Keppel REIT (KREIT SP) 1Q25: AEI Progress & Solid Results Underpin BUY Rating, Attractive 6.8% Yield

UOB Kay Hian Private Limited Thursday, 24 April 2025
Keppel REIT (KREIT SP) Q1 2025 Results: Strong Reversions & AEI Completions Signal Resilience Amidst Market Shifts

Keppel REIT (KREIT SP), a prominent player investing in quality income-producing commercial real estate across Asia Pacific, reported its financial results for the first quarter of 2025. With a portfolio AUM of S\$9 billion comprising premium Grade A office buildings in key cities like Singapore, Sydney, Melbourne, Perth, Seoul, and Tokyo, the REIT navigates the current market landscape with strategic asset enhancements and active leasing efforts.

UOB Kay Hian maintains its BUY recommendation on Keppel REIT, citing its attractive valuation and yield profile. The current share price stands at S\$0.845, with a target price of S\$1.06, suggesting a potential upside of 25.4%.

Q1 2025 Financial Performance: In Line with Expectations Despite Headwinds

Keppel REIT reported a distributable income of S\$53.4 million for 1Q25, marking a slight decrease of 3.2% year-on-year (yoy), which aligns with analyst expectations. This figure includes an anniversary distribution of S\$5 million. Notably, management adjusted the proportion of management fees paid in units from 100% down to 75% starting in 2025. Adjusting for this policy change reveals an underlying growth in distributable income of 3.2% yoy.

Key financial highlights for 1Q25 include:

• Property Income: S\$68.7 million, up 12.1% yoy. This growth was 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, an increase of 15.5% yoy, reflecting the positive contributions from Australian assets.
• Associates and JVs: S\$30.3 million, up 9.8% yoy, benefiting from higher rental income.
• Borrowing Costs: S\$23.1 million, an increase of 23.4% yoy. This rise is attributed to additional borrowings for the acquisition of 255 George Street and refinancing activities at higher prevailing market interest rates.

1Q25 Results Summary

Operational Highlights: Leasing Success and Portfolio Management

The REIT demonstrated robust operational performance despite some occupancy adjustments:

• Portfolio Occupancy: Eased slightly by 1.9 percentage points (ppt) quarter-on-quarter (qoq) to 96.0% as of March 2025.
• Ocean Financial Centre (OFC): Occupancy dipped 3.7 ppt qoq to 94.7% due to BNP Paribas returning several floors. However, KREIT has successfully backfilled 70% of this vacated space, achieving significant positive rental reversion exceeding 30%.
• Keppel Bay Tower: Occupancy decreased 6.8 ppt qoq to 92.5% following downsizing by a food & beverage tenant. KREIT received a one-off pre-termination fee of S\$3.0 million from this tenant, equivalent to 12 months’ rental income.
• Rental Reversion: Achieved a strong positive rental reversion of 10.6% in 1Q25. The weighted average signing rent for Singapore CBD office leases was S\$12.93 psf per month. With the average expiring rent for the remainder of 2025 at a lower S\$11.21 psf per month, KREIT is well-positioned to sustain positive reversions and targets double-digit positive rental reversion for the full year 2025.
• Weighted Average Lease Expiry (WALE): Remains long at 4.7 years for the portfolio, and even longer at 8.7 years for the top 10 tenants, providing income stability.
• Tenant Base: Diversified across 495 tenants, with Banking, Insurance & Financial Services (34.7%), Technology, Media & Telecoms (14.8%), and Government Agencies (13.0%) being the largest sectors.

Strategic Asset Enhancements (AEI) Completed

KREIT successfully completed key Asset Enhancement Initiatives (AEI) during the quarter:

• Pinnacle Office Park (Macquarie Park): Reinstated approximately 43,000 sq ft of Net Lettable Area (NLA) at Building D. A heads of agreement has already been signed with a tenant for 75% of this newly available space.
• 255 George Street (Sydney): Completed four fitted suites. One suite is already tenanted, another has a heads of agreement signed, and the remaining two suites are attracting strong leasing interest.

These enhancements are expected to contribute positively to future income streams.

Capital Management: Elevated Gearing and Refinancing Efforts

Aggregate leverage remained elevated at 42.1% as of March 2025. The interest coverage ratio stood at 2.5x, comfortably above the minimum requirement of 1.5x.

KREIT actively managed its debt profile in 1Q25:

• Completed refinancing for S\$421 million of loans at lower margins.
• Currently in the documentation stage for refinancing S\$475 million of loans maturing in 2Q25.
• The all-in interest rate rose 0.34 ppt yoy to 3.52% in 1Q25.
• Approximately 65% of KREIT’s borrowings are maintained at fixed interest rates, mitigating exposure to interest rate volatility.
• The weighted average debt maturity is 2.6 years.

Debt Maturity Profile (S\$m)

*Note: Approximate breakdown based on chart visualisation.*

Market Outlook: Moderate Growth Expected in Core CBD Office Rents

The Singapore Grade A office market in the Core CBD showed signs of strengthening, with rents increasing 0.8% qoq to S\$12.05 psf/month in 1Q25. This marks the first uptick after four consecutive quarters of flat growth. Demand remains robust from private wealth and asset management firms seeking prime office space with premium specifications.

However, the overall vacancy rate increased by 1.0 ppt qoq to 5.9% in 1Q25, partly due to non-renewals by large tenants like Meta Platforms at Marina One and Morgan Stanley at Capital Square. On the supply side, Keppel South Central has been completed, securing Manulife as an anchor tenant, while occupancy at IOI Central Boulevard has improved to over 80%.

Despite potential economic uncertainties, including the secondary impacts of potential reciprocal tariffs by the Trump Administration (though KREIT has no direct exposure to export sector tenants), CBRE forecasts a 2% increase in rents for Grade A Core CBD office space in 2025, supported by limited new supply. KREIT continues to see leasing demand from the banking, insurance & financial services, and technology, media & telecommunications sectors.

Leadership Transition

Mr. Chua Hsien Yang assumed the role of Chief Executive Officer (CEO) effective 1 January 2025. With over 20 years of experience in real estate fund management and having been with Keppel since 2008, Mr. Chua brings extensive expertise. His previous roles include CEO of Keppel DC REIT (2014-21) and Managing Director & Head of Mergers & Acquisitions at Keppel (2021-24).

Valuation and Investment Recommendation

UOB Kay Hian finds Keppel REIT’s valuation attractive. It offers a compelling forecast distribution yield of 6.8% for 2025, comparing favorably against peers like CICT (5.1%) and Suntec REIT (5.0%). The REIT trades at a significant discount to its net asset value (NAV), with a price-to-NAV (P/NAV) ratio of 0.68x based on an FY25 NAV per unit of S\$1.24.

The BUY recommendation is maintained, with a target price of S\$1.06 derived using a Dividend Discount Model (DDM) assuming a cost of equity of 6.5% and a terminal growth rate of 1.5%. No changes were made to the DPU forecast.

Share Price Catalysts

• Resilience in rents and capital values for office properties, particularly in Singapore and Sydney.
• Full-period contribution from the 255 George Street acquisition, which commenced in 2H24.

Key Operating Metrics Snapshot

*DPU is typically announced semi-annually.*

Portfolio Diversification

• By Country: Singapore (78.6%), Australia (17.6%), South Korea (2.9%), Japan (0.9%).
• By Tenant Sector: Diversified base with major exposure to Banking/Insurance/Financial Services (34.7%), TMT (14.8%), Government (13.0%), and Energy/Resources/Shipping (7.8%).
• Top 10 Tenants: Contribute significantly to gross rent, led by State of Victoria (5.7%), DBS (5.2%), Government of Western Australia (3.3%), BNP Paribas (2.8%), and The Executive Centre (2.7%). Other top tenants include Keppel, Ernst & Young, TikTok, Australian Taxation Office, and Standard Chartered.

Financial Forecasts

Key Financials (S\$m, except per share data)

Profit & Loss Forecast (S\$m)

Balance Sheet Forecast (S\$m)

Cash Flow Forecast (S\$m)

Key Metrics Forecast (%)

In summary, Keppel REIT’s 1Q25 results demonstrate operational resilience through strong leasing activity and successful AEI completions. While facing higher borrowing costs and slight occupancy dips in specific assets, the REIT’s proactive management, positive rental reversions, and strategic positioning in prime office markets support the maintained BUY recommendation and attractive yield proposition for investors.