Keppel REIT - Lacking Catalysts
- We maintain our NEUTRAL recommendation on Keppel REIT with an unchanged TP of SGD0.99 (5% downside).
- While near-term challenges persist in the Singapore office sector, the impact on Keppel REIT is buffered by high portfolio occupancy and low lease expiries.
- A potential uptick in office rental could come in early 2018 with supply bottoming out.
- The stock currently offers a FY17F dividend yield of 6.1% and trades at a relatively low 0.8x P/BV.
New methodology reveals negative FY16 rent reversions of 9%.
- Keppel REIT changed its methodology for computing rent reversions in 4Q16. While previous methodologies included other income such as lease pre-termination compensation, building advertising income and excluded one Singapore lease, the new methodology is calculated based on the change directly attributable to the new, renewal, forward renewal and review leases.
- We view the new methodology as a cleaner and true reflection of underlying market dynamics. Based on its revised methodology, 9M16 rental reversions stood at -9% compared to +3% reported earlier and 4Q16 saw negative reversion of 6%.
Headwinds persist in 2017 but impact buffered.
- Singapore office demand- supply dynamics remain negative in the near term, with 2.2m sqf of office space coming on stream in 2017, compared to 10-year average demand of 1.2m sqf. Thus, we expect office rents to see a further decline of 5-10% this year.
- However, the impact on Keppel REIT is buffered, as only 3.9% of lease expiries are pending renewals in 2017, with average rent expiries at a low SGD9 psf per month, below current spot rents.
Slight dip in portfolio occupancy.
- Occupancy at Bugis Junction Towers (BJT) dipped to 93.7% in 4Q16 as California Fitness vacated its premises. Management has backfilled two-thirds of the vacated space and is actively negotiating for the remaining space.
- Overall portfolio occupancy slipped 0.3ppts QoQ, but remains high at 99.2%.
Maintain NEUTRAL with a TP of SGD0.99.
- We have tweaked our FY17F DPU lower by 3%, factoring in lower contributions from BJT. Our TP is based on DDM methodology (CoE: 6.7%, TG: 2%).
- Key re-rating catalysts are a pick-up in office sector demand and timely acquisitions/divestments.