Keppel REIT Earnings: Dividend Miss on Lower Property Margins and Higher Borrowing Costs

Keppel REIT’s first-half 2024 results were slightly below our expectations as distribution per unit fell 3.4% year on year to SGD 0.028. The miss was mainly due to lower-than-expected net property income margins for its Australian investment properties and higher-than-expected borrowing costs as interest rates remain elevated. After updating our model to incorporate the weaker results, our 2024-26 DPU estimates were lowered by 3.0%-3.3%. Our fair value estimate of SGD 1.16 per unit remains. In our view, the REIT is still undervalued, and trades at an attractive 2024 distribution yield of 6.4%. Although we expect the weak near-term office demand in Singapore to persist through 2024, we expect interest rates to pivot from September 2024 onward to drive global economic growth and demand recovery for office spaces in 2025.