UOB Kay Hian Private Limited
Thursday, 24 April 2025
Keppel REIT (KREIT SP): BUY Maintained – 1Q25 Results Analysis and Future Outlook
Keppel REIT: Investment Overview
Keppel REIT (KREIT) is a real estate investment trust focused on quality income-producing commercial properties in the Asia Pacific region. As of the latest report, its portfolio boasts assets under management (AUM) of S\$9 billion, primarily consisting of premium Grade A office buildings. These properties are strategically located in prime business and financial districts across Singapore, Australia (Sydney, Melbourne, and Perth), South Korea (Seoul), and Japan (Tokyo). [[1]]
Stock Data Snapshot
- GICS Sector: Real Estate
- Bloomberg Ticker: KREIT SP
- Shares Issued: 3,870.6 million
- Market Cap: S\$3,270.7 million (US\$2,495.3 million)
- 3-Month Average Daily Turnover: US\$6.5 million
- 52-Week High/Low: S\$0.985 / S\$0.76
Price Performance
- 1 Month: (1.7)%
- 3 Months: (4.0)%
- 6 Months: (10.1)%
- 1 Year: (0.6)%
- Year-to-Date (YTD): (2.9)%
Major Shareholders
- Keppel REIT Investment: 29.5%
Key Financial Metrics
- FY25 NAV/Share: S\$1.24
- FY25 Net Debt/Share: S\$0.68
Investment Thesis: BUY Recommendation Maintained
UOB Kay Hian maintains a BUY recommendation for Keppel REIT with a target price of S\$1.06, offering an upside of 25.4% from the current share price of S\$0.845. The analysis is based on the REIT’s attractive distribution yield and P/NAV ratio. [[1]]
1Q25 Results: Completes AEI For Pinnacle Office Park And 255 George Street
Keppel REIT (KREIT) reported distributable income of S\$53.4m for 1Q25 (-3.2% yoy), which is in line with our expectation. Management has lowered the proportion of management fees paid in units from 100% to 75% starting from 2025. Adjusting from this change in policy, distributable income would have grown 3.2% yoy instead. [[2]]
- Distributable income of S\$53.4 million for 1Q25, a decrease of 3.2% year-over-year, aligning with expectations.
- KREIT has successfully backfilled 70% of the space vacated by BNP Paribas at Ocean Financial Centre (OFC), achieving positive rental reversion exceeding 30%.
- The REIT has reinstated approximately 43,000 square feet of net lettable area (NLA) at Building D of Pinnacle Office Park and completed four fitted suites at 255 George Street.
- KREIT offers a 2025 distribution yield of 6.8%, which is competitive compared to CICT (5.1%) and Suntec (5.0%), with a P/NAV ratio of 0.68x.
Financial Performance Analysis
Key Figures for 1Q25:
- Property Income: S\$68.7 million (+12.1% year-over-year) – Driven by higher occupancy at 2 Blue Street in North Sydney and contributions from the newly-acquired 255 George Street in Sydney CBD.
- Net Property Income (Attributable): S\$50.1 million (+15.5% year-over-year).
- Associates and JVs: S\$30.3 million (+9.8% year-over-year) – Benefitting from higher rentals.
- Borrowing Costs: (S\$23.1 million) (+23.4% year-over-year) – Due to additional borrowings for the acquisition of 255 George Street and refinancing at higher market interest rates.
- Distributable Income: S\$53.4 million (-3.2% year-over-year) – Includes an anniversary distribution of S\$5 million.
Growth Drivers and Challenges
- Stronger Growth from Australia: NPI attributable to unitholders increased by 13.3% year-over-year in 1Q25.
- Singapore Properties: Registered steady NPI growth of 3.3% year-over-year.
- Australia Properties: NPI increased by 20.8% year-over-year, driven by higher occupancy at 2 Blue Street and contributions from 255 George Street.
- Increased Borrowing Costs: Rose by 23.4% year-over-year in 1Q25.
- Portfolio Occupancy: Eased 1.9 percentage points quarter-over-quarter to 96.0% as of March 2025.
- Ocean Financial Centre (OFC): Occupancy dipped 3.7 percentage points quarter-over-quarter to 94.7% in 1Q25 due to BNP Paribas returning several floors; however, 70% of the vacant space has been backfilled with positive rental reversion above 30%.
- Keppel Bay Tower: Occupancy decreased by 6.8 percentage points quarter-over-quarter to 92.5% due to downsizing by a food & beverage tenant.
- One-Off Income: KREIT received S\$3.0 million in 1Q25, primarily from a pre-termination fee from the aforementioned food & beverage tenant.
Rental Reversion and Portfolio Strategy
- Strong Rental Reversion: KREIT generated a strong rental reversion of 10.6% in 1Q25.
- Singapore CBD Office Leases: Weighted average signing rent was S\$12.93 per square foot per month in 1Q25.
- Future Outlook: Management anticipates sustaining positive rental reversion, targeting double-digit growth in 2025, as expiring leases have an average rent of S\$11.21 per square foot per month.
- Portfolio WALE: Remains long at 4.7 years (top 10 tenants: 8.7 years).
Key Financials
The following table presents the key financial forecasts for Keppel REIT:
| Year to 31 Dec (S\$m) |
2023 |
2024 |
2025F |
2026F |
2027F |
| Net Turnover |
233 |
262 |
283 |
286 |
291 |
| EBITDA |
120 |
137 |
159 |
161 |
164 |
| Operating Profit |
120 |
137 |
159 |
161 |
164 |
| Net Profit (rep./act.) |
171 |
101 |
165 |
166 |
169 |
| Net Profit (adj.) |
138 |
145 |
165 |
166 |
169 |
| EPU (S\$ cent) |
3.7 |
3.8 |
4.3 |
4.2 |
4.3 |
| DPU (S\$ cent) |
5.8 |
5.6 |
5.7 |
5.7 |
5.4 |
| PE (x) |
23.1 |
22.2 |
19.9 |
19.9 |
19.8 |
| P/B (x) |
0.6 |
0.7 |
0.7 |
0.7 |
0.7 |
| DPU Yld (%) |
6.9 |
6.6 |
6.8 |
6.7 |
6.4 |
| Net Margin (%) |
73.2 |
38.5 |
58.1 |
57.9 |
58.1 |
| Net Debt/(Cash) to Equity (%) |
41.4 |
49.6 |
51.8 |
53.7 |
55.4 |
| Interest Cover (x) |
2.1 |
1.7 |
1.8 |
1.8 |
1.8 |
| ROE (%) |
3.2 |
1.9 |
3.2 |
3.2 |
3.3 |
| Consensus DPU (S\$ cent) |
– |
– |
5.5 |
5.7 |
5.7 |
| UOBKH/Consensus (x) |
– |
– |
1.04 |
1.00 |
0.96 |
Source: Keppel REIT, Bloomberg, UOB Kay Hian [[5]]
Balance Sheet and Gearing Analysis
- Elevated Gearing: Aggregate leverage remained high at 42.1% as of March 2025.
- Interest Coverage Ratio: Stood at 2.5x, exceeding the minimum requirement of 1.5x.
- Refinancing: KREIT completed refinancing S\$421 million of loans at lower margins in 1Q25 and is in the documentation phase for refinancing S\$475 million of loans maturing in 2Q25.
- All-In Interest Rate: Increased by 0.34 percentage points year-over-year to 3.52% in 1Q25.
- Fixed Interest Rates: Approximately 65% of KREIT’s borrowings are at fixed interest rates.
Market Dynamics and Strategic Initiatives
- Reciprocal Tariff Impact: Currently, no direct exposure to tenants in the export sector, but not immune to secondary impacts from a broader economic slowdown.
- Leasing Demand: Primarily driven by banking, insurance & financial services, and technology, media & telecommunications sectors.
- Moderate Rental Growth: Grade A office space rents in Core CBD increased by 0.8% quarter-over-quarter to S\$12.05 per square foot per month in 1Q25, marking the first increase after four quarters of flat growth.
- Vacancy Rate: Increased by 1.0 percentage point quarter-over-quarter to 5.9% in 1Q25 due to non-renewals by Meta Platforms and Morgan Stanley.
- Positive Developments: Keppel South Central was completed and secured Manulife as an anchor tenant, with IOI Central Boulevard improving occupancy to over 80%.
- CBRE Expectation: Anticipates a 2% increase in rents for Grade A office space in Core CBD in 2025 due to limited new supply.
- Property Enhancements: Completed AEI for Building D of Pinnacle Office Park and fitted suites at 255 George Street, reinstating approximately 43,000 square feet of NLA at Pinnacle Office Park.
Leadership Transition
- CEO Appointment: Chua Hsien Yang assumed the role of CEO effective January 1, 2025, bringing over 20 years of experience in real estate fund management within the Keppel Group.
Earnings Forecast and Valuation
- DPU Forecast: Maintained.
- Valuation Appeal: Attractive based on a 2025 distribution yield of 6.8% and a P/NAV of 0.68x.
- Target Price: S\$1.06, based on a DDM (cost of equity: 6.5%, terminal growth: 1.5%).
Share Price Catalysts
- Resilient rents and capital values for office properties in Singapore and Sydney, Australia.
- Contribution from 255 George Street in Sydney starting in 2H24.
Key Operating Metrics
The following table summarizes the key operating metrics for Keppel REIT:
| Metric |
1Q24 |
2Q24 |
3Q24 |
4Q24 |
1Q25 |
yoy |
qoq* |
| DPU (S cents) |
n.a. |
2.80 |
n.a. |
2.80 |
n.a. |
n.a. |
n.a. |
| Occupancy |
96.4% |
97.0% |
97.6% |
97.9% |
96.0% |
-0.4ppt |
-1.9ppt |
| Aggregate Leverage |
39.4% |
41.3% |
41.9% |
41.2% |
42.1% |
2.7ppt |
0.9ppt |
| Average Cost of Debt |
3.18% |
3.31% |
3.38% |
3.40% |
3.52% |
0.34ppt |
0.12ppt |
| % of Borrowings on Fixed Rates |
74.0% |
65.0% |
68.0% |
69.0% |
65.0% |
-9ppt |
-4ppt |
| WALE by NLA (years) |
5.4 |
5.3 |
4.6 |
4.7 |
4.7 |
-0.7yrs |
0yrs |
| Weighted Average Debt Maturity (years) |
2.3 |
3.0 |
2.9 |
2.5 |
2.6 |
0.3yrs |
0.1yrs |
| Rental Reversions |
10.9% |
9.3% |
10.2% |
13.2% |
10.6% |
-0.3% |
-2.6% |
| Tenant Retention Rate |
54.9% |
64.0% |
67.2% |
79.1% |
67.0% |
12.1ppt |
-12.1ppt |
Source: KREIT [[6]]
Portfolio Valuation by Country
- Singapore: 78.6%
- Australia: 17.6%
- South Korea: 2.9%
- Japan: 0.9%
Source: KREIT [[6]]
Tenant Diversification
- Banking, Insurance & Financial Services: 34.7%
- Technology, Media & Telecoms: 14.8%
- Government Agencies: 13.0%
- Energy, Natural Resources, Shipping & Marine: 7.8%
- Manufacturing & Distribution: 6.6%
- Legal: 6.8%
- Real Estate & Property Services: 6.5%
- Accounting & Consultancy Services: 5.0%
- Retail and Food & Beverage: 2.0%
- Services: 1.9%
- Others: 0.9%
Source: KREIT [[6]]
Top 10 Tenants by Attributable Gross Rent
- State of Victoria: 5.7%
- DBS: 5.2%
- Government of Western Australia: 3.3%
- BNP Paribas: 2.8%
- The Executive Centre: 2.7%
- Keppel: 2.5%
- Ernst & Young: 2.3%
- TikTok: 2.0%
- Australian Taxation Office: 1.9%
- Standard Chartered: 1.9%
Source: KREIT [[7]]
Debt Maturity Profile
- 2025: S\$226m
- 2026: S\$87m
- 2027: S\$9m
- 2028: S\$200m
- 2029: S\$189m
Source: KREIT [[7]]
