Net property income up 10.8 per cent on the year at S$148.5 million

 

KEPPEL Real Estate Investment Trust (Reit) : K71U -2.13%&rsquo s distributable income fell 1.9 per cent year on year to S$160.6 million for the first nine months of the fiscal year, mainly due to higher borrowing costs, said the Reit manager on Tuesday (Oct 22).

 

This includes an anniversary distribution of S$15 million, unchanged from the same period last year. 

 

Net property income (NPI) for the first nine months grew 10.8 per cent on the year to S$148.5 million, from S$134 million. 

 

The growth was attributed to strong operational performance with higher occupancy at Singapore&rsquo s Ocean Financial Centre and Tokyo&rsquo s KR Ginza II as well as contributions from the Reit&rsquo s office buildings, namely 2 Blue Street and 255 George Street in Sydney, Australia.

 

Koh Wee Lih, chief executive officer of the manager, said committed occupancy remained high at 98.9 per cent for Keppel Reit&rsquo s Singapore portfolio while its NPI for the first nine months of the fiscal year grew 3.8 per cent year on year.

 

Meanwhile, for its Australia portfolio, committed occupancy continued to improve in Q3 2024 to 95 per cent from 93.6 per cent in Q2 2024, while NPI for the first nine months of the fiscal year recorded a solid increase of 17.4 per cent year on year. 

 

Its two properties in North Asia have also maintained 100 per cent occupancy and recorded a strong 15.5 per cent year-on-year growth in NPI, said Koh.

 

&ldquo Looking ahead, we remain focused on proactive asset management while maintaining a prudent and flexible capital structure to deliver sustainable long-term total return to the unitholders,&rdquo he added.

 

Higher borrowing costs

Keppel Reit&rsquo s aggregate leverage increased to 41.9 per cent as at September 2024. Its borrowings on fixed rates constituted 68 per cent of total borrowings. Weighted average term to maturity of borrowings stood at 2.9 years.

 

Meanwhile, its all-in interest rate was 3.38 per cent per annum with adjusted interest coverage ratio at 2.7 times and sustainability-focused funding formed 81 per cent of total borrowings, its manager noted.

 

&ldquo Adopting a disciplined and prudent approach towards capital management, most of the loans maturing in 2024 have been refinanced and there are no significant refinancing requirements for the rest of 2024,&rdquo it said.  

 

Keppel Reit&rsquo s manager added that the majority of borrowings due in 2025 will mature in H1 2025 with refinancing discussions commencing with the lenders.

 

Koh Wee Lih, the CEO of Keppel REIT&rsquo s K71U 0.00% manager, sees the Singapore office market as &ldquo very resilient&rdquo , unlike the sector in the US and Europe. Keppel REIT has a diversified portfolio of prime commercial assets in Singapore, Australia, South Korea and Japan. In Singapore, the REIT owns Ocean Financial Centre and has majority stakes in Marina Bay Financial Centre, One Raffles Quay and Keppel Bay Tower.

 

&ldquo [The] office [sector] has been very misunderstood,&rdquo says Koh, who was speaking at the Bank of Singapore&rsquo s (BoS) Singapore REITs (S-REITs) outlook event on Aug 29. Koh was one of the panellists during the panel discussion. He was joined by Serena Teo, CEO of CapitaLand Ascott Trust HMN 0.00% &rsquo s (CLAS) Anthea Lee, CEO of Frasers Logistics & Commercial Trust BUOU 0.00% ' s BUOU 0.00% (FLCT) trustee-manager and BoS&rsquo s chief investment strategist, Eli Lee.

 

He adds that the REIT has seen a &ldquo strong demand&rdquo for offices in Singapore due to the city-state being a hub for Southeast Asia. The &ldquo flight to quality&rdquo and &ldquo flight to green&rdquo trend has been &ldquo very real&rdquo in the four markets the REIT is in.

 

Despite Singapore&rsquo s very small market size, the country is one of the &ldquo natural choices&rdquo for multinational corporations (MNCs) to set up their headquarters in.

 

Furthermore, coming out of Covid-19, MNCs have been shifting from their operations in North Asia to expand or move their premises to Singapore.

 

This isn&rsquo t a surprise to Koh, who notes that Singapore enjoys proximity to the major hubs of Tokyo, Shanghai and Sydney, which are all within a six- to seven-hour flight away.

 

In addition, Singapore&rsquo s attractiveness as a hub has only increased amid the current geopolitical tensions.

 

The Urban Redevelopment Authority (URA) has also indicated that they will not be releasing any new parcels of land for offices within the Central Business District (CBD) anytime soon, which has moderated some of the supply situation, Koh points out.

 

Though there are 2.9 million sq ft of new office space tipped to enter the market in 2024, only IOI Central Boulevard Towers, which is slated to be completed in this year, is located in the CBD. IOI will have 1.26 million sq ft of office space and 30,000 sq ft of retail, food and beverage spaces. The remaining new office spaces will be located in the fringe CBD areas and decentralised locations.

 

To be sure, even if URA were to release new office supplies in the CBD, Koh isn&rsquo t worried as the introduction of new offices will take &ldquo easily&rdquo four to five years, including planning and development.

 

On its other markets, Koh says the REIT still likes Australia as the market is &ldquo easy to understand&rdquo . After all, Australia is an English-speaking country that shares a similar legal framework as Singapore.

 

&ldquo We&rsquo ve also been there for a long time. That&rsquo s why I think when the market is still uncertain, we&rsquo ve the conviction to pull the trigger to invest,&rdquo he notes.

 

  Referring to the not-so-buoyant headlines about the Australian office sector, Koh says the REIT is &ldquo seeing different things&rdquo on the ground.

 

For instance, the Sydney CBD itself is subdivided to many segments, of which the REIT is in the core district which outperformed the rest of the city&rsquo s sub-segments. One of its buildings, 8 Chifley Square, is fully leased. The REIT bought the asset, a 30-storey Grade A premium commercial building, at a cap rate of 6.5%.

 

&ldquo You can have a debate about where long-term stabilised cap rate for office in Australia should be,&rdquo says Koh. &ldquo If you think it' s in the low 5%, like 5.25%, we are looking at [a] $100 million capital upside, and this [is] just on the capital gains, not forgetting that we will be&hellip earning a 6.5% yield as well.&rdquo

 

In early August, a memo circulated from New South Wales premier Chris Minns&rsquo department, stated that government sector employees were mandated to work in an approved office or related worksite, a move that Koh welcomes. He adds that his team also sees employees returning to the office with the REIT&rsquo s tenants and partners having three to four days in the office.

 

The infrastructure upgrades in Australia is another key catalyst in Koh&rsquo s view. One such upgrade is the new Metro train that will connect Sydney&rsquo s Macquarie Park directly to the city, which Koh sees as a &ldquo gamechanger&rdquo . &ldquo [This] will bring positive effect into Aussie office market itself particularly in New South Wales,&rdquo he says.

 

Overall, the REIT is positive on the long-term fundamentals in Australia, with its good resources and good immigration. With white collar jobs continuing to grow, Koh believes there is going to be demand for offices in the country.

 

As the global economy improves, there will be more demand for such resources, he adds.

 

&ldquo [Our] short-term to medium-, even long-term outlook for Australia is very positive. That' s why we have the conviction to invest when the dust is not settled yet,&rdquo says Koh. &ldquo But again, when the dust is fully settled, things will be fully priced in. You won' t get this potential capital outside.&rdquo

 

The Korean market is also performing well, if not better than Singapore, Koh adds, with the occupancy rate in T Tower in Seoul at 100% as at June 30 due to the lack of supply and the back-to-office culture in the country.

 

&lsquo Position of strength&rsquo

 

Today, Koh sees more opportunities for growth overseas, although the REIT has no plans to go beyond the Asia Pacific (Apac) region and beyond its current markets in the short term.

 

To him, Keppel has divested well since it listed on the Singapore Exchange S68 -0.09% (SGX) with just $600 million of assets under management (AUM). Today, the REIT has about $9.6 billion worth of prime quality assets in its portfolio.

 

&ldquo We obviously bought well along the way, but more importantly, we also divested well. We divested out of Bugis Junction in 2019 itself, and also exited from the Brisbane market back in 2021, and that' s why we have accumulated quite a sizable kind of capital gains,&rdquo he says. &ldquo Today, when the market is relatively weak, we come from position of strength, and we' re able to give anniversary distributions&hellip to reward [unitholders] for staying with us.&rdquo

 

&ldquo So I think that we' re very optimistic in all the four markets we are in right now,&rdquo he adds. &ldquo Ideally, I&rsquo d like to buy more in Singapore, but the numbers [are] just very difficult to stack up, because, again, Singapore trades at very tight cap rate, [which is] lower than the borrowing costs itself. So naturally, at this part of the cycle, I think [we are] likely to look to overseas for more growth opportunities.&rdquo

 

On the Monetary Authority of Singapore&rsquo s (MAS) move to flatten the aggregate leverage and interest coverage ratio (ICR) structure, Koh applauds the move. &ldquo I think it will simplify the whole landscape&hellip this will simplify [the] whole thing [and] make investors easier to understand [the REIT&rsquo s metrics],&rdquo he says.

 

&ldquo Coming from the recent kind of rate hike, a lot of REITs will be cautious trying to increase their gearing too high for acquisitions. I think for Keppel REIT, we have always been managing our balance sheet well I think we' ve always been prudent managing it,&rdquo he adds. &ldquo So with the recent acquisition, our leverage crossed [the] 40% [mark] but [in the] long term, we hope to stay below the 40% range. [This is] to have a strong balance sheet and also to give ourselves potential headroom to pounce on interesting acquisition opportunities.&rdquo