Keppel REIT - CIMB Research 2017-04-20: Business As Usual

KEPPEL REIT K71U.SI

Keppel REIT - Business as usual

1Q17 DPU of 1.45 Sts slightly below expectation, accounting for 22.5% of our FY17 forecast.
Renewed an attributable 67,700sf at slight negative rental reversion.
Tenant retention is key; a further 4.5% of leases to be renewed/reviewed in 2017, another 22.3% in 2018.

KREIT reported 3.2%/4.6% decline in 1Q17 topline/NPI on the back of income vacuum from the sale of 77 King St in Australia and lower contribution from Bugis Junction Tower (BJ).
Higher operating expenses, e.g. marketing and repair and maintenance, resulted in a 1.2% pt decline in NPI margin to 78.8%. This was partly offset by increased associate and JV contributions.
1Q17 DPU of 1.45 Scts was 13.7% lower yoy (without capital distribution from divestment gains) and accounted for c.22.5% of our FY17 forecast.

KREIT renewed/leased an attributable 67,700sf of NLA in 1Q17 and at a 1% negative rental reversion as competition from newly completed buildings continue to be a drag on rental rates.
With an 87% tenant retention rate, portfolio occupancy remained high at 99.4%.

KREIT has a remaining 4.5% of its leases up for renewal/review in FY17 and a further 22.3% in FY18. Expiring rents range from S$7.70-13.80psf in FY17 and S$8.10- 15.00psf in FY18.
While we think there could still be some rental pressure in 1H, we expect the leasing market to bottom out towards the latter part of this year as pre-commitment rates for newly completed properties have increased.
We expect KREIT to continue adopting a tenant-centric approach to maintain a well occupied portfolio.

Gearing remained stable at 38.4% and all-in interest cost ticked up marginally qoq to 2.57% in 1Q17.
With no refinancing needs till FY18 and 75% of its borrowings on fixed rate basis, we expect KREIT's balance sheet to remain robust.

We leave our FY17-19 DPU estimates unchanged but raise our DDM-based target price to S$1.09 in tandem with our sector-wide adjustment of Singapore discount rate assumption. Hence, we maintain our Hold rating.
A potential re-rating catalyst would be a quicker-than-expected recovery in the office sector while a protracted weak economy which would dampen appetite for office space is a key downside risk to our call

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-04-20

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.090 Up 1.030