Keppel REIT's third-quarter surge indicates office segment rebound: Moody's

Occupancy rates are going up.

In a comment following Keppel REIT's 3Q 2013 results, Moody's Investors Service says that Keppel REIT's performance is in line with Moody's expectations and continue to support its Baa2 issuer rating and stable outlook.

"Keppel REIT's 3Q 2013 operating results reflect the improvement in Singapore's office segment, as evidenced by the increase in occupancy rates at Ocean Financial Centre and higher contributions -- 33.2% year-on-year increase in the share of results from associates for the nine months to September -- from Marina Bay Financial Centre and One Raffles Quay," says Jacintha Poh, a Moody's Analyst.

Keppel REIT reported a 9.9% year-on-year growth in net property income for January-September, primarily driven by the improved performance at Ocean Financial Centre (OFC), a Grade A office building in Singapore's central business district (CBD), and additional earnings contribution from 8 Exhibition Street, a Grade A office building in Melbourne's CBD and which was acquired by the REIT in August.

Keppel REIT's portfolio occupancy rate also continued to improve to 99.4% in 3Q 2013 from 99.1% in 2Q 2013, as OFC's occupancy rate improved to 98.8% from 97.9% in the same periods. OFC also achieved stronger passing rent, as seen by the decrease in the proportion of rental support to 20% of total income in 3Q 2013 from 23% in FY2012 (January-December 2012).

"We expect Keppel REIT's occupancy rates to remain strong over the next 12-18 months, as only 1.2% of its total leases are due for renewal for the rest of this year, with another 3.4% next year. In addition, the trust has a portfolio weighted average lease expiry term of 6.4 years," says Poh.

Moody's notes that in 3Q 2013, the REIT also completed the building of a seven-storey retail and car park annex at OFC, adding approximately 8,300 square feet of retail and food and beverage space, and 222 car park spaces. According to the REIT, the retail podium is mostly leased and the tenants have commenced their fitting-out works. The car park spaces have started generating income from 1 September. Moody's expects the retail podium and car park spaces to generate additional annual gross rental income of SGD2-3 million.

During 3Q 2013, Keppel REIT also continued its early refinancing efforts and successfully refinanced 100% of borrowings coming due in 2014 and also a portion of loans maturing in early 2015. As a result, the REIT does not have any refinancing requirements over the next 24 months and the weighted average term to expiry of borrowings has been further extended to 3.8 years from 3.6 years in 2Q 2013.

"We view Keppel REIT's proactive management of lengthening its debt maturity profile as supportive of its rating and expect the REIT to maintain its financial discipline while pursuing growth to keep its credit profile within its targeted rating parameters," adds Poh.