Keppel REIT - 1Q17 Results Flash Note
- DPU declines 13.7% YoY; Results slightly below
- We maintain our Neutral recommendation with TP of SGD0.99 based on our DDM methodology (CoE: 6.7%, Tg: 2%).
- The stock currently offers FY17F dividend yield of 6%.
- Keppel REIT (KREIT) 1Q17 DPU declined 13.7% YoY due to absence of contribution from 77 Kings Street building, lack of other gains and lower contribution from Bugis Towers. The results were slightly below our expectations accounting for 23% of our full year forecasts.
- Contribution from associates grew 23.2% YoY on the back of oneoff income from One Raffles Quay and Marina Bay Financial Centre.
- JV contributions were up 22.2% YoY due to higher contribution from David Malcolm Justice Centre in Perth.
- Portfolio Occupancy increased 0.2 ppt QoQ to 99.4% on the back of higher occupancy in Singapore (99.3%) and Australia (99.7%) properties.
- Portfolio weighted average lease expiry(WALE) stands healthy at 6.0 years.
- Gearing stands at 38.4%. All in borrowing costs edged up slightly to 2.57% (4Q16: 2.51%) with the issuance of SGD75m Medium Term Notes at a 3.275% in Apr 2017. About 75% of loans are fixed with no refinancing requirements until 2018.
- In 1Q17, KREIT signed 10 leases(~82,700 sqft, attributable ~67,700 sqft) achieving -1% rent reversion. Only 2.8%/6.9% of leases(% of NLA) are due for renewal in FY17/18 mitigating the impact of potential decline in Singapore Grade-A office rents. Based on CBRE 1Q17 data, rents for Grade A office buildings in Singapore declined at a slower pace of 1.6% QoQ vs. 2.2% in 4Q16. With office supply slowly tapering off post 2017, we expect the rents to bottom out this year and start rebounding in 2018.
- In Australia, leasing activities remains strong in Sydney and Melbourne Central Business Districts (CBD), while CBDs of Brisbane and Perth are showing early signs of recovery.
- Overall, We expect KREIT's DPU to remain under pressure for the reminder of the year from lower rentals and expiry of rental support. Maintain Neutral with TP of SGD 0.99, based on DDM methodology (COE – 6.7%, TG – 2%).
- Key re-rating catalyst are pickup in office sector demand and timely acquisitions/divestments.