REITs − Singapore - 4Q16 Results Of KREIT (Below), MIT (Above), ART (In Line)
- Keppel REIT (KREIT)’s results came in below our expectations. Positive leasing newsflow was seen, coupled with positive office absorption.
- Maintain BUY on KREIT with an unchanged target price of S$1.21.
- Keppel REIT (KREIT), Mapletree Industrial Trust (MIT) and Ascott REIT (ART) have reported their quarterly results.
Keppel REIT (KREIT SP/BUY/S$1.045/Target: S$1.21)
Results below expectations, maintain BUY with DDM-based target price of S$1.21 (required rate of return: 6.7%, terminal growth: 1.4%).
- Keppel REIT reported 4Q16 DPU of 1.48 S cents, down 11.9% yoy.
- 4Q16 gross revenue and net property income fell 6.5% yoy and 9.6% yoy respectively on lower contributions from Bugis Junction Towers and divestment of 77 King Street.
- 4Q16 property expenses were up 6.9% yoy on higher property tax.
- The results came below expectations, with FY16 DPU representing 96% of full-year forecast.
- Rental reversion methodology recently revised, now taking into account leases under review (on top of new, renewal and forward renewals), with FY16 reversions at - 9%. 1H16 and 9M16 reversions were restated to -9% and -11% respectively (previously 2% and 3% respectively)
- Property revaluations were mostly positive despite a 20% drop in market spot rentals (from peak) except for Bugis Junction Towers that saw a marginal S$10m (- 1.8%) drop in values.
Enthusiastic forward renewals, leaving a mere 3.9% and 7.1% by NLA remaining in 2017 and 2018 respectively.
- About two-thirds of the space vacated by California fitness at Bugis Junction Towers has been filled. These would minimise tenant flight risk during the next wave of commercial supply due in 2H16 to 2017, from the likes of Guoco Tower (0.9m sf in 2016), Marina One (1.9m sf in 1Q17) and Duo (0.6m sf in 4Q16.
- We understand from management that the bulk of these expiring leases are in their first renewal cycles and are thus likely to be renewed.
Limited downside implied from expiring rents.
- Average rents due for renewal and review in 2017 and 2018 range in the low S$9 psf, implying limited downside to current Grade-A rentals (S$9.10 psf pm).
- According to CBRE, Grade-A office rentals declined 2.2% qoq in 4Q16 to hit S$9.10 psf pm (20% decline from 1Q15’s peak of S$11.40 psf pm).
- We opine that Grade-A rental decline could be fast approaching a bottom, especially as qoq declines have been slowing since 3Q16 (-2.1% qoq), vs qoq declines during 3Q15-2Q16 (- 3.5% to -4.8%).
Positive leasing newsflow and office absorption.
- Pre-leasing at Marina One and Duo reportedly stand at about 30% and 35% respectively at the moment. According to media sources, Facebook is taking up more than 250,000 sf of space (about 13% of total) at Marina One, which will bring pre-commitment to about 43%.
- According to CBRE, leasing demand at DUO Tower and Guoco Tower led to the second consecutive quarter of positive island-wide take-up of 0.54m sf in office space for 4Q16, compared to previous four consecutive quarters of negative space absorption (average -0.23m sf).
Expect pick-up after short-term pressure.
- We expect a potential recovery in 2018, post supply digestion next year, after around 20% correction in office rents from 1Q15’s peak.
- Beyond 2018, core CBD office supply remains meagre at below 0.9m sf (Frasers Tower as well as the redevelopment of International Factors Building and Robinson Towers).