Keppel REIT Earnings: Higher Borrowing Cost Offsets Net Property Income Growth

Keppel REIT's second-half 2023 earnings were in line with our expectations, with higher borrowing costs and a larger share base negating the growth in net property income and resulting in distribution per unit, or DPU, declining 1.7% year on year. The trust's operating metrics remain robust, with high portfolio occupancy rate of 97.1% as of year-end 2023. Management guided a mid- to high-single-digit positive rental reversion for 2024, but we think the growth will be offset by high borrowing cost. As 75% of the trust's total borrowings are fixed-rate debt, this may preclude it from fully enjoying the benefit of upcoming interest rates cut in 2024. As such, we forecast its DPU to stay flat for 2024 before growing 5.8% and 3.8% year on year for 2025 and 2026 due to lower financing expenses. We maintain our fair value estimate of SGD 1.16 and continue to recommend Keppel REIT as our top pick among Singapore REITs.