Keppel REIT (K71U.SI) Earnings Call Transcript

Hello, everyone. Thank you for taking the time to join us this morning for Keppel REIT's Full Year 2023 Results Briefing. I'm Tong Yan from the IR team. Before we begin, let me introduce the management team on the session. We have Mr. Koh Wee Lih, Chief Executive Officer; Mr. Sebastian Song, Chief Financial Officer; Ms. Teo Xuan Lin, Head of Investment; and Mr. Rodney Yeo, Head of Asset Management. We will start the briefing with the presentation by the management team followed by a Q&A session. [Operator Instructions] I will now hand over the time to the CEO, Wee Lih, please.

All right. Thanks, Tong Yan. A very good morning to everyone, and thank you for joining us today for Keppel REIT's full year results briefing for 2023. Starting with the key highlights on Slide 3. Underpinned by higher rentals and occupancy for the Singapore properties, NPI grew 3.7% year-on-year to $182.4 million. Keppel REIT's portfolio performance continued to be resilient, achieving positive rental reversion of 9.9% for the full year of 2023. Portfolio committed occupancy was higher at 97.1% as compared to 95.9% as of 30th of September last year. If excluding 2 Blue Street, which achieved practical completion in April last year, the portfolio occupancy would have been 98.3%. Portfolio and top 10 tenants' WALE remain long at approximately 5.5 years and 9.7 years, respectively. On capital management, our aggregate leverage was 38.9%, while full year all-in interest rate was 2.89% per annum. Borrowings on fixed rate was 75% as at end 2023. Distribution to unitholders was $218.7 million for 2023, while DPU was $0.058. Next, I'll hand the time over to Sebastian, who will provide an update on our financial results.

Thank you, Wee Lih. Moving on to Slide 5. Property income for 2023 increased 6.3% year-on-year due mainly to higher rentals and occupancy of our Singapore properties. On the other hand, property expenses increased due mainly to higher utility costs and property taxes. Share of results of associates increased 3% year-on-year due mainly to higher NPI recorded, attributable to higher rentals for all properties and increased occupancy for most of the properties. However, this was partially offset by higher borrowing costs incurred. The increase in share of results from joint ventures is mainly due to the commencement of new leases at 8 Chifley Square, offset partially by the weakening of the Australian dollar against the Singapore dollar. Borrowing costs increased 16% year-on-year to $67 million, in tandem with the higher interest rate environment, coupled with the cessation of capitalization of borrowing costs for 2 Blue Street following its practical completion in April 2023. Overall, distribution to unitholders was $218.7 million, a 1% decrease year-on-year. DPU for the second half of 2023 was $0.029, and unitholders can expect to receive them on 15th of March 2024. Slide 6 provides the key balance sheet figures. Adjusted net asset value per unit as at end 2023 was $1.29. Moving on to Slide 7. As at 31st December 2023, aggregate leverage was 38.9%. Through our capital management efforts, an all-in interest rate of 2.89% per annum was recorded. Borrowings on fixed rates were maintained at around 75%. Our sustainability-focused funding increased slightly to 64% of our total borrowings, following the repayment of certain green loans. For debt maturing in 2024, they are mostly falling due in the second quarter. We are in advanced discussions with the respective lenders. And notwithstanding those ongoing discussions, we have sufficient capacity to finance all maturing debt. I will now hand the time to Rodney and Xuan Lin, who will talk through our portfolio and market updates.

Thank you, Sebastian. Slide 9 shows Keppel REIT's portfolio breakdown by different geographical locations. Singapore remained Keppel REIT's biggest market at 79.1%; while Australia, Seoul and Tokyo are at 16.5%, 3.4% and 1%, respectively. Amongst the 12 properties in our portfolio, 10 have occupancies of 95% or higher, with 8 Chifley Square and KR Ginza II achieving 100% occupancy recently. And 2 Blue Street is also receiving 100% of income from the rental guarantee from the developer. As at the end of 2023, Keppel REIT's portfolio value is around SGD 9.2 billion. Moving on to Slide 10. In 2023, we committed a total of more than 1.5 million square feet of space and achieved rental reversion of close to 10%. Tenant retention rate was in excess of 70%. New leasing demand and expansions were mainly from the technology, media, telecoms, banking, insurance and financial services and also the energy, natural resources, shipping and marine sectors. At the end of 2023, Keppel REIT's portfolio committed occupancy remained high at 97.1% or 98.3% if excluding 2 Blue Street. And portfolio WALE remained long at 5.5 years and 9.7 years for the top 10 tenants. We continue to maintain a well-spread lease expiry profile. The weighted average signing rent achieved for our Singapore CBD office leases was $12.41 per square foot per month in 2023, which is higher than CBRE's fourth quarter 2023 average core CBD Grade A office rent of $11.90 per square foot per month. The continuing uplift in signing rents translates into a 9.0% rental reversion achieved by our Singapore portfolio in 2023. Expiries for 2024 is manageable at 12.6% by attributable NLA and 13.7% by attributable gross rent. Slide 12 shows our established and diversified tenant base comprising established blue-chip corporations and government tenants that provide long-term stability to the portfolio. On to the next slide. As part of our efforts to ensure that our properties continue to be the preferred choice amongst the tenants, the garden plaza and North and South Tower lobbies at One Raffles Quay will be undergoing AEI to elevate arrival and tenant experience. There will also be new seating areas at the lobbies to promote collaboration and networking amongst tenants. Food and beverage offerings will also be expanded to enrich the building's amenities and to provide more options for tenants. The AEI will commence in the first quarter of 2024, with completion expected to be end 2024. Over in Australia, we also completed the refurbishment of Pinnacle Office Park's lobby in January 2024. The ground floor lobby, café area and lift lobby were refreshed to elevate the arrival and tenant experience. In addition, a new convertible clubhouse lounge and meeting rooms were created to offer tenants comfortable and private areas for social events and meetings. The outdoor terrace was also renovated to modernize and upgrade the seating areas as well as to create a walking track to allow tenants to socialize. I will now hand the time over to Xuan Lin.

Thanks, Rodney. The next 2 slides provide a summary of our year-end property valuations. On Slide 16, valuation for Singapore portfolio increased 1% as compared to the June 2023 valuation. This is mainly from the increase in the valuation of MBFC and One Raffles Quay due to higher passing rents and rental growth expectations. Slide 17 shows our overseas asset valuations. Due to softening of cap rates, some of our Australian assets recorded a decrease in valuation. Excluding 2 Blue Street, our Australian portfolio saw a drop of 4.2% in Australian dollar terms for the full year of 2023. Moving on to Korea, valuation for T Tower in Seoul increased by 4.2% in local currency, and this is mainly due to higher rents. For KR Ginza II, the Japanese yen valuation increased by 7.1% in local currency, mainly due to higher signing rents of the new leases. Overall, our total portfolio valuation increased by 0.8% in Singapore dollar terms. The next couple of slides shows that we are committed to supporting sustainable practices and in giving back to the community. As part of community engagement efforts, children from Care Corner Singapore Student Care Centres were invited to attend a caroling performance by the Anglo-Chinese Junior College Choir and received gifts donated by Keppel Bay Tower's tenants. In Australia, a community activity was hosted at David Malcolm Justice Centre to share waste and recycling initiatives at the property through fun and engaging quizzes. Pinnacle Office Park also achieved certification on its carbon-neutral status, a demonstration of Keppel REIT's continued focus on managing its portfolio's carbon footprint. Moving on to Slide 19. Based on our preliminary data, we reduced our Scope 1 and 2 emissions by more than 5%, while energy usage was reduced by more than 2% as compared to our 2019 baseline. Similarly, our water consumption also registered a more than 14% reduction. More details on our sustainability strategy, targets and performance will be made available in our Sustainability Report, which will be issued in end March or early April. Slide 20 shows the various green achievements that we have achieved at the corporate portfolio and asset level. All of Keppel REIT's properties are green certified with the exception of 2 Blue Street, which is in the process of certification. Pinnacle Office Park also achieved carbon-neutral status, a demonstration of Keppel REIT's continued focus on managing our carbon footprint. The next few slides summarizes key trends in the office markets which Keppel REIT has presence in. On Slide 22, the Singapore office market remains resilient with Grade A occupancy staying around 95% in end 2023. Rents also increased to $11.90 per square foot in the last quarter of 2023, and a tight office supply in the longer term is expected to support the rents. Moving on to the next slide. Most Australian office markets continue to be stable with North Sydney and Perth CBD recording higher occupancies, while Sydney occupancy remains unchanged. Macquarie Park and Melbourne CBD recorded lower occupancies. We see effective rents recovering as prime gross effective rents for all markets, except Melbourne CBD, increased in the fourth quarter of 2023. The next slide shows the office space market trend in Seoul. Seoul continues to outperform as occupancy increased to 98.5% from 96.6% 1 quarter ago. Net effective rents also increased 2% quarter-on-quarter. Moving on to the last slide on the Tokyo office market. Office occupancies of Grade A and B, office within the core 5 wards of Tokyo remain high at above 95% with rental decline slowing. That concludes our presentation. Thank you.

Thank you, management. So we'll now open the floor for Q&A. [Operator Instructions]

So we have Rachel from DBS.

Maybe just to kickstart, a few questions from me. In terms of the Singapore office, what was the rental reversion for fourth quarter and an outlook for the reversions in 2024 and any major expiries coming up in 2024?

I think we've announced -- I mean, we also disclosed that for Singapore, portfolio is 9% rental reversion itself. 2024, I think if you look at the CBRE report, they continue to see positive rental reversion between 2% to 3%. And likewise, I think we remain optimistic on the Singapore reversion. There is one chunk of lease expiring in 2024, and this one obviously was signed quite a while back. So, again, we expect this to capture a good significant -- I mean, a significant positive rental reversion with the renewal of this lease, but let's see how it goes.

Yes. I think to clarify, the 9.0% positive reversion for Singapore was for the 12 months 2023. Rachel's question is fourth quarter, right, Rachel?

Yes, that's right.

Fourth quarter is 11.3% for Singapore portfolio.

Okay. Any major expiries coming up in 2024 in Singapore that we should be aware of or any potential risk of IOI Central Boulevard completion? And also the expiries coming up in Australia as well, anything from Pinnacle Office Park?

Okay. Let's tackle Singapore first. There are a couple of big expiries coming up, I'm sure you are aware. But I think there is very low to no risk of losing big tenants to IOI. I think it's a very low expiry year at 12.6% of the portfolio, and exposure is quite manageable. For Australia, Pinnacle Office Park, there is only one kind of larger tenant that is expected to expire in 2024. And that risk is also mitigated by the fact that their space is actually quite good space, but we want to improve it further. So we'll be doing an AEI at POP to improve that space.

Yes. And just to add, I think POP also, I think we rolled out some spec suite strategies, and that's very well received by the tenants. So we have been leasing out quite good. But obviously, we continue to look at enhancing the customers' tenant experience and also look to carry out AEI to future-proof the assets like what we have shown in the slides.

Just on Singapore lease expiries, can we get a sense which building is it from?

We don't want to disclose the specific. Again, I think like what Rodney mentioned, we are very confident that this tenant will fill, right, and this will likely bring positive rental reversion. So in fact, if anything, I want the renewal to happen earlier rather than later, but it is what it is. So we remain confident and optimistic on the Singapore office market outlook, at least for our portfolio.

Okay. And the next one is on, any more further refinancing happening on the JV level for 2024 and outlook on the cost of borrowing?

Rachel, yes, there will be one loan that will be up for refinancing this year at our associate -- at one of our associated companies. So we are in advanced negotiation with the lenders already. So we have come to lending on the pricing. So anything else, it would really depend on what the SORA is when we finally carry out the refinancing. But based on, I think, today or yesterday's rates, I think a 3- or 5-year SORA looks something like 2.8% or 2.9%. So if you add a margin in, that will be about in the high 3s.

Okay. How does that compare to the expiring interest rates?

The margins are more favorable due to our relationship and also the strength of the underlying asset. So margins have always been favorable. So it really, really depends on what the SORA outcome is.

Okay. Got it. So I guess the existing loan is probably lower too, is it? Or even lower? I just need to get a sense how big is the impact on refinancing.

Sorry, was there a question? How big the loan is?

No. How big is the impact of a refinancing on the interest rate?

You can comment where the interest rate will trend for 2024...

Well, I think -- okay. So I mean, if you look at the debt maturity profile on the slides, so we have about $600-over million or 22% of our total debt that's due for refinancing. So if we are to apply today's SORA on all these expiries, I think we might be at 3.5-ish for this year.

I mean it's no surprise that definitely interest rate is higher than when we entered into the loan a few years back itself. But obviously, through our active hedging strategy, we have managed to keep it low, and we'll continue to take a proactive approach in managing our hedges and interest rate exposure to continue to have a competitive cost of capital over there.

Terence from J.P. Morgan?

Congrats, really, on the results. I just wanted to ask 2 sets of questions. Firstly, what drove the cap rate compression at ORQ? I see that cap rates have moved down, it seems like quite substantially at ORQ, and the cap rates look to be even lower than supposedly better quality assets at like MBFC. And also maybe a second question. Given that you still will see interest rate headwinds this year, would you consider additional capital support to offset the higher interest cost this year?

Yes, I'll take the first question. So we do an independent -- full independent evaluation every year. So we also happen to change valuers for ORQ this year. So every time we change a valuer, there's always a set of values that they use for their work. So yes, I think that's the main reason why the cap rate changed. So it's part of it. It's just one of many variables that valuers take to use to derive a value. So they all have their own different way of deriving value.

Yes. And on the second part on the -- I mean, obviously, interest rate is going up itself, right? Too early to say, and we want to give so-called guidance on the DPU and things like that. But what I can say here, we are committed to deliver the anniversary distribution. And we'll continue to go through -- I mean we will deliver that in 2024 as well. So I think that the unitholders can expect to receive that $20 million full year anniversary distribution from us.

Brandon from Citi, you can go ahead with your questions.

I just have a couple of questions. Any updates on your proposed divestment plans? I think if you look at Australia, the valuation seems to be coming down. Does that kind of imply that you're looking to sort of do something on that front? That's my first question. The second question is, what are the plans on buybacks? Are you looking to do more given that gearing now is at a slightly lower rate?

Yes. So on the capital recycling, I said it is ongoing strategy. We continuously look at recycling opportunities throughout our portfolio and not just restricted to Australia. That's one thing I want to highlight itself. So yes, we continue to look for such opportunities to perhaps recycle the assets to better usage and maybe to manage our leverage itself. As in the share buyback, I mean, obviously, the whole market as well as especially K-REIT saw a good rally there. So we just let the market flows through. I think we continue to have that mandate and prepare to intervene as and when necessary itself. But again, I think let's see how the market goes from here.

Yes. I just have just a quick question, right, on your leasing for FY '23. I think on the certain deck you mentioned, you were showing the split between new leases and renewal leases. I noticed that for FY '23, there was no review leases. But 9-month '23, there was about 2.5% of review leases. So I just want to find out, what's the discrepancy there?

Sorry, Brandon, which slide are you referring to?

I think it's -- just give me a minute.

Is it Slide 11?

No, no. Yes, no, Slide 10. In Slide 10, I think it was 52.5% new, 47.5% renewal. That is for FY '23, right? But if you were to look at the 9-month '23 numbers, there was a 2.5% of rent review. So I mean, it's a small issue, but I just wanted to find out what's the discrepancy there?

Sorry, we'll check and come back to you, Brandon.

Okay. Sure. No problem. That's it.

Joy from HSBC.

A couple of questions from me. First of all, just back to capital recycling and asset sales, what are you seeing in terms of the bids that are coming in? And which markets are you seeing a bit more interest between Australia and Singapore? And then second question, more on shadow space. Is there shadow space in your Sing portfolio? What percentage would that be?

I'll answer the second question first. No shadow space in our Singapore portfolio. So I think like, say, Australia itself, yes, you see that the carrier expanded. So hopefully, the worst is behind us. Let's see how it goes. But again, I think our capital recycling is not restricted just to Australia and open to the rental portfolio. Obviously, Singapore continued to perform well, and it's also a very chunky asset. We like to again continue to enjoy the positive rental reversion coming from the Singapore portfolio. So our likely capital recycling will come from Singapore.

Sure. And then if I can just follow up on Australia. Blue & William, I've seen some -- your occupancy has been ticking up. If you look at the rents versus what the income support level is, where -- what sort of a comparable can we draw on?

I think Blue & William definitely has leased at better rates than we expected. So I think we are probably about 8% to 10% above our underwriting rent thereabouts so far, knock on wood.

I see. And incentives on that asset?

I think that the incentives are in line with what we expected in our underwriting.

Xuan from Goldman.

Can I clarify the 2023 rent reversion guidance for Singapore again? Was it 2% to 3% you mentioned earlier?

The 2023 rent reversion...

Sorry, 2024 guidance for rent reversion.

That's from CBRE report. But again, I think if you look at our chart, right, for our portfolio, you should refer to Slide 11, right? So over there, we did highlight what kind of expiring rent in 2024, $11.19 versus where the spot rent is today. And I think you can probably connect the dots.

I think earlier you guided for low- to mid-single digit, right? Does that still stand for 2024?

Yes. We expect to -- our expectation is that the market will -- because the supply dynamics are quite muted, so we still expect that we will have positive reversion, mid- to high-single digits.

That's mid- to high-single digit, right? Have that taken into account potential rent decline? Or are you assuming spot rent stays unchanged?

Given what we've been seeing over the past 3 to 6 months, the market has slowed a bit, but the -- I think it's more like the pace of the increases have kind of slowed down. But I think the market is still in a healthy state in Singapore. So we still expect that we'll see some reversion, some positive reversion in Singapore.

Joy, you still have your hand raised. Do you have additional questions?

No, I'm good. I'm going to lower it.

Any more questions from the analyst side? We have one question from the Webex, which is on the guidance for rental reversion for office in each country.

Yes. Guidance, we don't provide guidance for rental reversions on each country that we're in, but I can provide a little bit of color on the markets, the different markets. So in Singapore, I think it's more or less steady as she goes with 80% of our portfolio here. Singapore CBD office rents, we expect it to remain stable with a slight upward trend. That would kind of put us in a striking zone of, hopefully, low single digit -- mid-single digit kind of positive reversions for 2024. For Australia, Perth assets 100% leased, so nothing to talk about there. For Melbourne, we expect -- we're seeing -- we have seen headline rents move up. Incentives are quite stable still. So I think in general, the markets in Melbourne is a bit more challenging, but headline rent is still moving -- face rent is still moving up. For Sydney, Sydney CBD, it's quite -- we're seeing a bit of a bounce back. Leasing demand has come back a bit. And again, also headline rent, we expect it to keep chugging up slowly. Incentives are still stable.

Then we'll circle back to Brandon's question just now regarding the rent review that you saw in our 9-month results deck, the 2.5%. And for our full year result, we actually put it together with the renewals. So if you need the breakdown for the lease committed by type, for new, it's 52.5%, renewal is 45.7% and the rent review is 1.8%.