Keppel Reit 'quietly confident' despite fall in office occupancy; H2 DPU down 1.7% to S$0.0288

The manager of KEPPEL Reit K71U on Tuesday (Jan 25) said it was "quietly confident" on positive news ahead on the leasing front, even as the Covid-19 pandemic continues to hamper a return to office.

Keppel Reit's portfolio committed occupancy fell to 95.4 per cent as at Dec 31, 2021, down 1.7 percentage points from 97.1 per cent in the preceding quarter. Year on year, portfolio occupancy has dropped 2.5 percentage points from the 97.9 per cent recorded as at Dec 31, 2020.

Before the Covid-19 lockdowns had led to work-from-home arrangements becoming the norm, the real estate investment trust (Reit) reported portfolio occupancy at 99.1 per cent as at end-December 2019.

"As the economy slowly reopens, we are seeing an increase in enquiries on the space, so we are feeling confident in trying to backfill these spaces. There's actually a little bit of tailwind behind us as well," said Koh Wee Lih, chief executive officer of Keppel Reit, at a briefing following its results announcement.

While the Omicron variant has introduced some uncertainty, Keppel Reit manager's head of asset management Rodney Yeo said business sentiment has been seen to be improving as work-from-home is no longer the default.

"We've seen the number of tenants returning to the office increase swiftly to above 40 per cent in recent weeks," Yeo said. "We're getting some pretty good positive traction in terms of leasing... (and) we are actually quite quietly confident that we should be able to announce some good leasing news in the next 1 or 2 quarters."

Meanwhile, the Reit manager said it had also seen positive rental reversions.

Office rental reversions were at positive 2 per cent for the second half of fiscal year 2021 ended December, and at positive 3 per cent for full year.

Rental reversions were up 2.8 per cent across its Singapore office assets, and up 10 per cent in Australia and 8.6 per cent in South Korea.

The Reit manager said that on the leasing front, a total of some 2 million square feet (sq ft), with an attributable area of 888,600 sq ft, were committed in FY2021.

This included new and expansion leases from tenants across sectors such as financial services, technology, media and telecommunications, as well as manufacturing and distribution.

A majority of the leases concluded were in Singapore and the average signing rent for the Singapore office leases was S$10.56 per sq ft per month.

Portfolio weighted average lease expiry stood at 6.1 years, with tenant retention rate at 62 per cent for FY2021.

For H2 2021, Keppel Reit posted a distribution per unit (DPU) of S$0.0288, down 1.7 per cent from S$0.0293 in the corresponding year-ago period, largely due to an enlarged unit base.

Distributable income for H2 was 6.6 per cent higher year on year at S$106.4 million, compared to S$99.8 million in the year-ago period.

For the full FY2021, the Reit's DPU came in at S$0.0582, up 1.6 per cent from FY2020's DPU of S$0.0573, while distributable income was up 9 per cent to S$212.1 million.

The Reit attributed the improvement to accretive acquisitions in Australia and Singapore - namely Victoria Police Centre in Melbourne and Pinnacle Office Park in Sydney in 2020, and Keppel Bay Tower in Singapore in May 2021.

Other contributing factors included the Reit's efforts to drive asset performance through proactive leasing and cost-management strategies. These were, however, partially offset by the impact of the divestment of Keppel Reit's 50 per cent stake in 275 George Street in Brisbane in July 2021.

Distributable income for H2 2021 and FY2021 included capital gains distribution of S$2.0 million that arose from past divestments.

"Going forward, we'll be assessing the level of capital gains that will be required to stabilise the distribution," said chief financial officer of the Reit manager Kang Leng Hui.

Net property income attributable to unitholders for H2 was up 17.5 per cent S$79.9 million; property income was up 16.9 per cent to S$110.8 million.

For capital management, Keppel Reit said the weighted average term to maturity of its borrowings was 3.1 years, and 5 per cent of total borrowings are due for refinancing in FY2022.

The Reit's aggregate leverage stood at 38.4 per cent, and the all-in annual interest rate was 1.98 per cent.

The Reit said it had undertaken "active portfolio optimisation" over the course of the year, with the acquisitions of Keppel Bay Tower in Singapore and Blue & William in North Sydney, as well as unlocking of value from divestment of 275 George Street in Brisbane.

It added that it is reinforcing focus on sustainability, with new targets for material environmental, social and governance (ESG) factors.

Looking ahead, Keppel Reit's manager said Grade-A commercial buildings with strong safety and service levels are well positioned to attract and retain tenants.

The Reit manager said it will continue to actively manage the portfolio to ensure stable and sustainable distributions to unitholders, as well as achieve long-term growth.

Units in Keppel Reit closed flat at S$1.16 on Tuesday, prior to the announcement of the results.