Keppel REIT: Positive Rental Reversion Drives Optimism Despite Higher Costs

CGS International

April 23, 2025

Keppel REIT (KREIT) is demonstrating resilience through positive rental reversions, even as it navigates increased interest expenses and shifts in management fee structures. This analysis dives into the REIT’s recent performance, strategic initiatives, and future outlook, providing investors with a comprehensive overview.

1Q25 Performance Overview

• Keppel REIT’s 1Q25 distribution income reached S\$53.4 million, aligning with 24% of the FY25F forecast. [[1]]
• Revenue and Net Property Income (NPI) saw year-over-year increases of 12.1% and 13.3%, respectively, reaching S\$68.7 million and S\$54.6 million. [[1]]
• These gains were primarily fueled by contributions from 255 George St and increased occupancy at 2 Blue St in Australia, alongside organic positive rental reversions and a one-off income of S\$3 million. [[1]]
• However, distribution income was 3.2% lower yoy due to higher interest costs and a change in management fee structure where 25% is now paid in cash instead of units. [[1]]

Occupancy and Rental Reversion Dynamics

• Portfolio committed occupancy experienced a slight dip, decreasing by 1.9% points quarter-over-quarter to 96% as of the end of 1Q25. [[1]]
• This decline was attributed to lower occupancy rates at Ocean Financial Centre (OFC) and Keppel Bay Tower (KBT). [[1]]
• The REIT has successfully backfilled approximately 70% of the vacated space at OFC, supported by positive rental reversions. [[1]]
• In 1Q25, Keppel REIT renewed or leased around 260,000 sq ft of space, with demand originating from banking, insurance, financial services, TMT, energy, shipping, marine, and real estate sectors. [[1]]
• Rental reversion averaged +10.6% in 1Q25, compared to +16.5% in 4Q24, with average signing rents for Singapore leases at S\$12.93 psf/month. [[1]]
• Approximately 6.5% of leases are up for renewal/review in 9M25F, and a further 21.1% in FY26F. Management anticipates healthy rental reversions, citing low average expiring rents of Singapore leases at S\$11.21, S\$12.04, and S\$11.26 psf for FY25F, FY26F, and FY27F, respectively. [[1]]
• The guidance remains to achieve double-digit rental reversions for FY25F. [[1]]

Gearing, Funding Costs, and Capital Management

• Aggregate leverage stood at 42.1% as of 1Q25. [[1]]
• Interest costs increased to 3.52% (compared to 3.4% at the end of FY24), while the adjusted interest coverage ratio (ICR) was 2.5x over the same period. [[2]]
• Approximately 65% of the REIT’s debt is on fixed rates. [[2]]
• The expectation is that funding costs for FY25F will remain within the mid-3% range. [[2]]
• The focus remains on portfolio optimization to enhance yield and returns, alongside improving capital structure to boost capital efficiency. [[2]]

Revised DPU Estimates and Target Price

• FY25-26F Distribution Per Unit (DPU) estimates have been lowered by 2.9-5.9% to account for the latest FY24 annual report and the change in management fee payment to cash. [[2]]
• The DDM-based Target Price (TP) has been reduced to S\$1.08. [[2]]
• Potential catalysts include boosting portfolio occupancy and increasing average passing rents. [[2]]
• Risks include longer-than-expected frictional vacancy due to slower backfilling of office space and reduced demand due to hybrid work models. [[2]]

Investment Recommendation

• The “Add” rating is reiterated. [[2]]
• The target price is S\$1.08, with an upside of 27.8% [[2]].

Financial Summary

Peer Comparison

Keppel REIT is compared against its peers, focusing on Price/NAV and Dividend Yield. [[2]]

ESG Analysis

Keppel REIT’s commitment to Environmental, Social, and Governance (ESG) factors is evident through its sustainability initiatives and targets. [[3]]

• LSEG ESG Score: KREIT achieved a B- overall ESG score in 2023. [[3]]
• Pillar Scores: Environmental (B), Social (B-), Governance (C+). [[3]]
• ESG Controversies: Scored A+ in ESG Controversies. [[3]]
• Strategic Pillars: Guided by Environmental Stewardship, Responsible Business, and People and Community. [[3]]
• Board ESG Committee: Established in Sep 2022 to enhance governance related to sustainability matters. [[3]]

ESG Targets

• Halving Scopes 1 and 2 emissions by 2030 from 2019 base level. [[3]]
• Reducing energy and water usage by 10% and 5%, respectively, by 2030. [[3]]
• Increasing renewable energy usage to 40% by 2030. [[3]]

ESG Achievements

• Retained 4-Star rating, Green Star Status, and ‘A’ rating for Public Disclosure at GRESB 2024. [[3]]
• Singapore assets maintained Platinum status under BCA Green Mark scheme. [[3]]
• Australian operational assets achieved 5 Stars and above in NABERS Energy rating. [[3]]
• As of end-2024, 12 of KREIT’s properties are green-certified. [[3]]
• 82% of end-2024 total borrowings are green loans, exceeding the 50% target. The updated target is to maintain at least 75% of sustainability-focused funding from 2025. [[3]]

Areas for Improvement

• Rated low on environmental innovation (D+), community (D+), and CSR strategy (C-) by LSEG in 2023. [[3]]

ESG Highlights in 2024

• 22.5% reduction in Scopes 1 and 2 emissions (from 2019 baseline). [[3]]
• 19.5% reduction in energy usage (vs. 2019). [[3]]
• 25.3% portfolio renewable usage. [[3]]
• 16.4% reduction in water usage (vs. 2019). [[3]]
• 16.2% of total waste generated was recycled. [[3]]
• Employees achieved an average of 31.8 hours of training. [[3]]
• Dedicated over 1,100 hours to community outreach activities. [[3]]