Keppel REIT (K71U.SI) Earnings Call Transcript

Hi. Good morning, everyone. Thank you for taking the time to join us this morning for Keppel REIT's First Half 2024 Results Briefing. I'm Tong Yan from the IR team. So before we begin, I'd like to 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. So we will start the briefing with the presentation by the management team followed by a Q&A session. Please be reminded to only unmute your mic during the Q&A. I will now hand over the time to the CEO, Wee Lih, please.

Thank you, Tong Yan, and a very good morning to everyone. Thank you for joining us today for the Keppel REIT's first half 2024 results briefing. Starting with the key highlights on Slide 3. Property income grew 9% year-on-year to $125 million, and net profit income grew 7.7% year-on-year to $96.8 million. It is driven by higher rental contributions, as well as our new acquisition. However, DPU decreased to [ $0.028 ] due mainly to higher borrowing costs. Our financial position remained healthy. Aggregate leverage was 41.3%, and with all-in interest rate at 3.31% per annum for the first half of 2024. Borrowings on fixed rate was 65%, as at 30th June 2024. Moving on to the Slide #4. Keppel REIT's portfolio continued to deliver robust performance in the first half of 2024. Rental reversion was 9.3%, with portfolio committed occupancy increased to 97% from 96.4% in the previous quarter. Portfolio weighted average lease expiry or WALE remained at 4.6%, while top 10 tenants will remain long at 8.3 years. As at 30th June, portfolio valuation was SGD 9.6 billion with Singapore remaining, as Keppel REIT's largest market at 77%. I will now hand the time to Sebastian, who will bring you through our financial results.

Thank you, Wee Lih. Moving on to Slide 6. Property income and net property income for the first half of 2024 increased 8.9% and 7.7% year-on-year, respectively, due mainly to higher occupancy of Ocean Financial Center and KR Ginza 2, as well as contributions from 2 Blue Street and the newly acquired 255 Job Street. Share of results of associates increased 7.8% year-on-year. The increase is due mainly to higher rentals and occupancy, offset partially by higher borrowing costs and property expenses. The decrease in share of results of joint ventures is due mainly to a weaker Australian dollar against the Singapore dollar. Borrowing costs increased 29.8% year-on-year, largely in tandem with the high interest rate environment, coupled with the cessation of capitalization of borrowing costs for 2 Blue Street following expected completion in April 2023. Distributable income and DPU for the first half of 2024 decreased 1.9% and 3.4% year-on-year to $106.9 million and $0.028, respectively. Slide 7 provides a record date for the distribution, which will be on the 7th of August with a payment date on 13th of September. On Slide 8, the increase in deposited property and borrowings is mainly due to the acquisition of 255 George Street. Adjusted net asset value per unit, as at 30th of June 2024 is [ $1.27 ]. Slide 9 provides the key capital management metrics and debt maturity profile. Aggregate leverage was 41.3%, as at 30th June 2024, and all-in interest rate increased to 3.31% per annum for the first half of 2024. Borrowings on fixed rates and sustainability-focused funding form 65% and 82% of our total borrowings, respectively. We have refinanced most of the loans that are expiring in 2024 and do not have any major refinancing requirements until the first half of 2025. Slide 11 shows the portfolio breakdown, as at 30th of June 2024 by geographical locations. Singapore remains the largest market at 77%, while Australia, South Korea and Japan are at 19%, 3.1% and 0.9%, respectively. After securing a new tenant from the technology, media and telecommunications sector, occupancy of 2 Blue Street increased from 66.4% to 77.7%. T Tower also achieved full occupancy after securing new tenants from the banking, insurance and financial services, as well as government agency sectors. Slide 12 shows the breakdown of our performance by geography. Net property income figures comprised those of directly held properties, as well as our attributable share of net property income of associates and joint ventures. The Singapore portfolio recorded an increase in net property income due to higher rentals and occupancy. Net property income for the Australian portfolio also increased due to contributions from 2 Blue Street and 255 George Street, partially offset by a stronger Singapore dollar. North Asia portfolio, which consists of T Tower and KR Ginza 2, recorded an increase in net property income and is mainly due to the increased occupancy of KR Ginza 2. I'll now hand the time to Rodney and Xuan Lin, who will talk through our portfolio and market updates.

Thank you, Sebastian. Moving on to Slide 13. Please note that we are disclosing the information based on gross rent instead of net lettable area. You can find the information based on net lettable area in the additional information section. In the first half of 2024, we committed more than 546,000 square feet of space and achieved portfolio rental reversion of 9.3%. Tenant retention rate was 64%. New leasing demand and expansions were mainly from the banking, insurance and financial services, technology, media and telecoms and legal sectors. As at 30th June 2024, Keppel REIT's portfolio maintained a high committed occupancy of 97% and a long WALE of 4.6 years and 8.3 years, respectively, for the portfolio and the top 10 tenants. Slide 14, we continue to maintain a well-staggered lease expiry profile. The weighted average signing rent achieved for our Singapore CBD office leases was $12.63 per square foot per month in the first half of 2024. The average rent for the leases expiring at our Singapore properties was $10.77 per square foot per month, which is below both our signing rent and CBRE's average core CBD Grade A office rent of $11.95 per square foot per month. Remaining expiries for 2024 is 7.2% by attributable gross rent and 6.2% by attributable NLA. Slide 15 shows our established and diversified tenant base, comprising established blue-chip corporations and government tenants that provide long-term stability for the portfolio. The next 3 slides provide a summary of our midyear property valuations. On Slide 16, valuation for our Singapore portfolio increased 0.6%, as compared to the December [ 2023 ] valuation. This is mainly contributed by the increase in valuations for MBFC Tower 3 and Keppel Bay Tower due to higher passing rents and rental growth expectations. Slide 17 shows our Australia portfolio valuations, including our newly acquired 255 George Street, the valuation of our Australia portfolio, as at 30th of June 2024, increased 16.6%, as compared to the valuation, as at 31st December 2023. Excluding 255 George Street, the valuation would have been [ AUD 1.6555 billion ], a decrease of AUD 76.2 million or 4.4%. This decrease in valuation is due to softer cap rates. Moving on to Slide 18. Valuation for T Tower in Seoul remained stable, while valuation for KR Ginza 2 increased by 0.7% in local currency terms. Overall, in Singapore dollar terms, our portfolio valuation increased by 3.3% and excluding 255 George Street, valuation would have been slightly lower by 0.2%. I now hand the time to Xuan Lin.

Thank you, Rodney. Moving on to Slide 19. Building on our sustainability efforts, various activities were organized in the second quarter of 2024. 8 Exhibition Street organized an activity aimed to create awareness and encourage behavioural change on waste management for our tenants. 8 Exhibition Street also held a meet and greet session for the Melbourne City Mission, the fundraiser for the Sleep at the G to provide tenants an opportunity to find out more about ending youth homelessness. Over at Marina Bay Link Mall to 5,500 kilograms of used clothes were collected from January to June 2024 for an upcycling initiative. The next few slides summarize key trends in office markets, which Keppel REIT has presence in. On Slide 21, the average rent of core CBD Grade A office in Singapore remained at $11.95 per square foot per month with an average occupancy in the core CBD at 94.4%. Moving on to Slide 22, prime grade occupancies in North Sydney and Macquarie Park increased, while occupancies in Sydney City, Melbourne City and Perth City was slightly lower, as at 30th of June 2024. The next Slide 23 shows the office space market trend in Seoul. Seoul continuous to exhibit resilience with high occupancy of 98.4%, while net effective rents increased 1.2%. Moving on to the last slide on the Tokyo office market. Both office occupancies and rents for Grade A and B offices improved during the quarter. Occupancies of Grade A and B office within the Central 5 wards of Tokyo increased to 96.4% and 97%, respectively. Net effective rents for Grade A and B offices also increased 1.8% and 3.4% quarter-on-quarter, respectively. That concludes our presentation.

Okay. We will now open the floor for Q&A. [Operator Instructions] So we have the first question from Brandon. Brandon, yes, go ahead.

Yes. I think I saw Terence hand up [indiscernible]. Do you want to -- can you ask the [Technical Difficulty].

We'll go by alphabetical order.

Can I just get a sense of the cap rate that you revalued Australia this half year? Is it sufficient, as we go into second half, given that you bought 255 there 6.5%, but your cost doesn't seem to be nearing that kind of level yet?

Yes. I think good question, Brandon. I think the valuers think that it's sufficient for now. The Austria -- but the Australian market, obviously, is, as with a number of markets around the world is probably in a state of a bit of a flux. So as far as we know, this is sufficient for the -- the valuers think this is sufficient for now.

Yes. And just to add, following our transactions, there are some other transactions that came out to the market as well, like 5 Martin Place probably you transacted at around [ 6 -- 6.1 ] cap rate. So like while Rodney says it is a bit of a flux, and it seems like cap rate has tightened since our purchase itself. So we'll continue to see the thing -- again, I think we engage third-party valuers to do the valuation of this round. So this is -- so definitely there is [indiscernible].

Are you able to share the rental growth assumptions that the valuers have priced in?

For which market and -- I mean, we typically don't share that because then it gets into -- because it gets into a suite-by-suite kind of conversation, and that's a lot of detail. So we typically don't share that.

But maybe to give you a bit more color for Australia, again, I think headline rent continue to trend up, and it's expected that incentives would tighten from the current mid-30s kind of range itself. So things are definitely optimistic.

Got it. Got it. Okay. And going back to the funding source, right? I mean, looking at your gearing, this quarter is up above 40%. And obviously, I think it seems that we have seen the per market opening up again. So just on the acquisitions front, are you looking to use that source again or even [ pad out ] some of that using that avenue.

Again, I think we are definitely mindful of our leverage, and we'll continue to look at ways to how to pair it down. And again, there are a few matters and wouldn't rule out asset recycling as one of those matters as well.

So -- so basically [ cuts are ] offered.

No, I don't think we want to commit to anything right now, but no plans for us at this point in time. What I think we communicated previously, we'll look at ways to pay down the leverage and asset recycling would be one of those methods that we will do.

Thanks, Brandon. Terence, do you want to go ahead.

Yes. I just wanted to ask on NPI. On a Q-on-Q basis, NPI, if you strip out the addition from 255 George Street, actually looks like it has declined. Could you give us a sense of what drove the decline in NPI? And then on the second question, there is media reports, which suggest that you are stepping away from the divestment of T Tower. So could you give us maybe an update on how you're seeing asset recycling plans? And what's the time line to bring gearing down below that 40%?

Yes. Maybe I'll start with the second question first, then my team will answer the first one. Again, we typically don't comment on market rumors or unconfirmed kind of press journalists reporting itself. What we can say is we're still committed to bring down the gearing. And -- but again, I want to stress that we are not a distressed seller. We wanted to make sure that we want to negotiate the best deal for unitholders in this kind of time. So again, I say the overall trend is, hopefully, interest rate come down soon. But we will definitely long term wise, we want to keep our gearing at a lower level than where we are. Move back to the first question.

Yes. And Terence, just to clarify, you are comparing first quarter and second quarter of this year.

Yes. Just first quarter and second quarter, excluding, let's say, 255 George.

Okay. Sure. I think -- okay. So in the first quarter, we received also some of one-off income from one of our assets in Australia. So that might have caused 1Q to be higher. But all in all, I think the asset performance in terms of NPI for all assets are generally quite stable. We've seen some property tax increases in Australia. But that said, I think in terms of [ PI ], it's still pretty stable if you strip out the 255 George Street.

Could you give us a sense of the one-off in the first quarter?

Yes. That came from the Pinnacle Office Park in Australia. So that was about $1 million.

Thanks, Terence. [ Del, do you want to go ahead ].

Just 2 quick questions from me. I think firstly, can you remind us on the funding of this 255 George Street. What was the mix of SGD and the AUD you use for the acquisition?

Yeah. [ Hi, Del ]. So it's -- at the onset, I think we said we try to balance the economics and the currency exposure. So that was at about [ 30, 30-ish Aussie dollar funding ]. After that, we issued a Aussie dollar green loan if you pick that up. So now the mix is close to [ half-half ]. It's about high [ 40s ] for Aussie dollar debt funding.

Okay. Okay. Got it. Okay. And still on the financing cost, right, the 3.31% that is the year-to-date figure. Could you give us an idea of what second Q number looks like?

Yes. I think previously, we guided, we are looking at a mid-5% for the full year. Sorry, sorry [ mid-3% ].

I almost had a heart attack on that.

Sorry, I got that. That's around, so -- yes, [ mid-3s ]. So I think we are still sticking to that. Of course, in the past 2 to 3 weeks, we've received some encouraging news and also some encouraging movements in the interest rates. But I think we would still hold to commit [ 3 ] guidance. And then if anything happens in September if -- and also depending how SORA and the Aussie interest rates react to that we've still [ mid -3s ] for now.

Just a quick follow-up on that, right? SORA at the [ mid-3 levels ], [ mid-3.5% ] levels, just wondering with your current hedging of 65%, is that a comfortable level? Or are you looking to increase or lower it?

Yes. It has reduced 65% because due to some refinancing exercise this quarter. So there were a number of fixed rate loans that were refinanced and they -- we have not hedged all of them. So I think it's fallen to 65%. Ideally, we would like to maintain a higher fixed rate ratio, maybe in the range of 70% to 75%. I think that provides a lot more certainty. But I think -- yes, so given what the environment is right now with the favorable sentiment setting in, we are just monitoring what happens over the next 8 weeks to see if there's an opportunity for us to increase that ratio.

Thank you, [ Del ]. Joy, do you want to go ahead.

Sure. Just 2 questions from me. First on Singapore leasing. Could you share the rental reversion number for the quarter itself and also guidance for the second half? Probably where are you seeing most demand coming from? And the second question is, you did have quite a bit of a jump in temporary adjustments in your DPU. Can I understand, is there in relation to specific leases? Or this is -- as you sign out more leases, these are tenancy incentives?

I'll take the leasing questions. So Singapore leasing rental reversions was 7.2% in the second quarter of 2024. Leasing demand -- view on second half of the year, I think second half of the year, sort of the way we look at things is probably flat to slightly up in terms of rental rates in what we signed at. But that said, we actually don't really have very much new leasing to do because there was just a few more renewals for the rest of the year, and our portfolio in Singapore is pretty well occupied. So not much new leasing to do at the moment. So...

Yes. And to add to that, I think for renewals in the second half, we expect to continue to see strong rental reversion [ at front ].

Yes. And Joy, on your question on the net tax adjustment is the temporary difference that I just witnessed this half year, slightly higher due to reversal of our deferred tax. So we typically provide capital gains tax for our foreign assets. So because of the decrease in valuation of our Aussie assets, we made some reversals, so that was reflected in that line.

And this is largely all adjustments made for Aussie assets, right?

That's right.

Joy, do you have any more questions?

I'm good.

Thanks. Vijay, you want to go ahead with your question.

A couple of quick questions for me. Firstly, in terms of overall occupancy, I think you have done a good job in terms of keeping the occupancy high. But looking at second half, any color -- I mean, I understand that IOI is still about 45% to 65% kind of occupancy level. Is this still considered a challenge? Can you give some color in terms of where the occupancy -- I mean, leases are expiring in the second half?

Yes. So we have, in the second half, a few kind of major leases that we -- kind of larger leases that we are in the midst of renewing. So I think we are quite settled there for the rest of the year in terms of retention for our Singapore portfolio. From what we understand, actually, IOI also has raised their kind of quoting rents. So it's in the sense between [ $12 to $14 ], depending on where you are in the stack. And that compares actually very favorably with what we're seeing, what we're getting in our buildings. So I think the value proposition has to be, I think, quite large for the tenant to want to move to IOI, seeing that rents probably -- there's not much savings for -- by moving is what can I say.

Okay. So can we expect occupancy to be around here moving into second half?

It's a bit of a forecast that we don't normally like to give out, but I think occupancy should stay stable for the rest of the year.

Okay. Okay. I think earlier you noticed, I mean, you mentioned about the gearing levels. Maybe can you give some color in terms of what is your target gearing levels moving into second half. And you mentioned divestment is the strategy, which you will be looking at. Can you just pick out some assets, which you think are potential for divestments and is the T Tower still a divestment candidate?

We do want to -- like I say, I think we definitely committed to bring down the gearing and to enable us to negotiate a good position. We wanted to like if specific tenant considered, but we're definitely committed to bring down gearing and to negotiate a good deal for unitholders itself. And to be told, I think we have more than one asset in our portfolio that is ready for divestment. So we are [ currently ] exploring that. So we hope to be able to bring the gearing to 40% in the short to medium term. But again, we want to make -- and there are no pressure right now in terms of financing, and we want to make sure that we secure the best deal for our investors.

Okay. My last question, I mean, gearing at these levels, would you still consider buybacks, considering the [ steep ] discount?

It really depends. But I think you will know that we borrow to fund the buybacks. So we might take a pause for now and depending on where unit price hits. So yes, yes, probably not for now.

Thank you, Vijay. [ Xuan ] do you want to go ahead.

My first question is on cost of debt, right? Can you give us a sense for 2025 debt expiry, what are the expiring [ be ]? And so how should you think about cost of debt in the next year? And also, the second question is on leverage mix, right? If the leverage mix is changed to 50%, would you still be looking to divest to improve gearing? Or will you be comfortable -- more comfortable at 25%?

Yes, probably I'll take on the first question. So I don't think we are able to share too much color on the expiring rates of the loans that are following due next year. But I think definitely, they will be refinanced at higher rates, large proportion of this are currently hedged at pretty favorable rates. But I think it's -- is slightly premature for us to actually estimate or actually provide income guidance for 2025. I think it's important that we see what happens in the next 6 months. And I think if what is predicted right now falls through, I think we'll be optimistic that we'll be able to refinance 2025 loans at pretty decent rates.

Yes. As to [ MBFC ], I think it's just a consultation paper for now. But long-term-wise, strategy is to maintain a strong balance sheet. And like what I've shared with Vijay earlier, long term, we want to be able to keep the leverage below 40% regardless of where [indiscernible].

Thanks, [ Xuan ]. Brandon, you still have your hand raised. Do you have further questions?

Yes. Just one more, right? I think can you sort of comment right on just this NPI margin for some of your Aussie assets like 8 Exhibition, Victoria Street, as well as like Pinnacle Office Park, right? So if you look at the margins for this first half and if you compare to like second half last year and even the previous semiannual periods, they seem to be on a downward trend. So is it purely because of property tax? Or is there something else that we are missing here? And is this just one-off?

Yes. So far 8 Exhibition Street and was it Victoria Police Center question.

Yes.

Yes. I think -- okay. So these are the State of Victoria. So property taxes have been -- sorry, land tax has increased. I think this in tandem with the annual value, as assessed by the State revenue Office. This is also coupled with the increase in absentee surcharge. So I think that has contributed largely to the increase in land tax and then consequently, the NPI margin.

Okay. Okay. So can I take it and for this half -- first half of 61%, that's the new norm is it?

It really depends. I think the land tax rates are here to stay, but also, it's largely driven by property income fluctuations as well. It should be in this range on -- or the average of this half and previous [ halves ], I guess.

Yes. But also bear in mind that long-term leases at VPC, they have annual escalation that will help as well.

And how about Pinnacle Office Park? Is it purely a function of occupancy?

Pinnacle Office Park, it's largely driven by higher property expenses in general.

Thanks, Brandon. I think we [indiscernible] any more questions?

Yes. It's Mervin here from J.P. Morgan. Just a question on the changes in thin cap rules in Australia. I understand from last quarter that you're trying to restructure should be the used tax [ linkage ]. Can you give us an update in terms of what you're doing in terms of the structuring as well as and you quantify impact of maybe higher taxes?

That is still in works. So we're still working with our tax adviser on the optimal restructuring method. So we think we can only complete the exercise maybe in the next few months. So I think -- but the conclusion is there will definitely be an increase in withholding tax that we have to pay, but we are unable to quantify that right now until we have arrived at a conclusion what the optimal restructuring mix will be.

What's the current effective tax for Australia then? Can you share that [ figure]?