Keppel REIT (KREIT SP) – Singapore’s Office Market Outlook Brightens

Keppel REIT’s financial performance has maintained a steady course in FY24, with its property income and net property income (NPI) for 2H24 rising by 15.5% and 15.3% year-on-year (YoY) to SGD136.5 million and SGD95.7 million, respectively. Despite this robust growth, higher borrowing costs—up 34.3% YoY to SGD47.3 million—resulted in a 3.4% decline in distribution per unit (DPU) to 2.80 Singapore cents in 2H24. For FY24, DPU fell by the same margin to 5.60 Singapore cents, slightly below forecasts.

Strong Rental Reversions and Positive Market Dynamics

Keppel REIT achieved strong portfolio rental reversions of 13.2% in FY24, marking an improvement from 9M24’s 10.2%. Notably, Singapore’s core CBD Grade A office rents increased marginally to SGD11.95 per square foot per month (psf pm) by the end of 4Q24, while average signing rents for Keppel’s Singapore office leases stood higher at SGD12.56 psf pm for FY24. The outlook for FY25 appears promising, with market rental growth expected to remain modestly positive due to tight supply and resilient demand.

Leverage and Valuation Updates

The aggregate leverage ratio declined by 0.7 percentage points quarter-on-quarter (QoQ) to 41.2%. Singapore’s portfolio, contributing 77.9% of Keppel REIT’s assets under management, recorded a 0.9% revaluation gain in 2H24. However, impairments in overseas assets offset these gains, leading to a relatively stable overall portfolio valuation of SGD9,531.6 million.

Recommendation

OCBC Investment Research recommends a BUY for Keppel REIT with a fair value estimate of SGD0.92.

CapitaLand India Trust (CLINT SP) – Mixed Results with a Positive Trajectory

FY24 has been a year of both challenges and opportunities for CapitaLand India Trust. While total property income and NPI grew by 19% and 14% YoY respectively, reaching SGD277.9 million and SGD205.6 million, the NPI margin for 2H24 dropped to 72% from 76% in 2H23 due to higher operating expenses. Consequently, FY24’s distribution per unit (DPU) fell short of expectations, meeting only 96% of OCBC’s forecast and 91% of consensus estimates.

Operational Strengths and Divestment Progress

Occupancy rates improved by 1 percentage point to 92%, with rental reversions ranging from +1% to +9%. However, aVance Hyderabad experienced a -1% reversion due to a rent-free period. On the divestment front, management is confident in reducing its minority stake in data centers (DCs) to 33%, which will decrease development costs from SGD1 billion to SGD670 million. The first two DCs are set to become operational by 2Q25, with expected yields of 10.5% to 11% post-stabilization.

Gearing and Valuation Highlights

Gearing fell from 40.1% to 38.5% due to asset revaluation gains, driven by a reduction in the capitalisation rate from 9% to 8.25%. Excluding acquisitions, CLINT’s asset valuation rose by approximately 15.5% in FY24. The average cost of debt remained steady at 6%, with no major changes anticipated.

ESG Initiatives

CLINT has made significant strides in its sustainability efforts. A 21-megawatt captive solar plant was commissioned in Tamil Nadu, boosting renewable energy usage by over 70%. Furthermore, 99% of its portfolio is now certified as green buildings, far exceeding the industry average of 29%.

Recommendation

OCBC Investment Research assigns a BUY rating for CapitaLand India Trust with a fair value estimate of SGD1.27.

Other Highlights from the Market Pulse Report

• Keppel DC REIT (KDCREIT SP): Solid turnaround story with a BUY rating and a fair value of SGD2.43.
• CapitaLand Ascott Trust (CLAS SP): Stability emerging from exceptionalism with a BUY rating and a fair value of SGD0.99.
• Starhill Global REIT (SGREIT SP): Steady trajectory with no surprises. Assigned a HOLD rating and a fair value of SGD0.50.
• OUE REIT (OUEREIT SP): Positioned for growth with a BUY rating and a fair value of SGD0.345.
• Mapletree Pan Asia Commercial Trust (MPACT SP): Resilient Singapore performance offsetting overseas weakness. BUY rating with a fair value of SGD1.48.
• Mapletree Industrial Trust (MINT SP): Mixed quarter but positive outlook with a BUY rating and a fair value of SGD2.71.
• Frasers Centrepoint Trust (FCT SP): Solid fundamentals with a BUY rating and a fair value of SGD2.45.
• Mapletree Logistics Trust (MLT SP): Subdued results but in line with expectations. BUY rating with a fair value of SGD1.61.
• Apple Inc (AAPL SP): Pricing in bad news but remains a BUY with a target price of USD259.00.
• PropNex Ltd (PROP SP): Demand and supply are stabilizing. Assigned a HOLD rating with a fair value of SGD1.14.