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.
- Maintain Hold, with a slightly higher target price of S$1.09.
1Q17 results highlights
- 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.
Maintaining tenant retention strategy
- 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%.
Little remaining lease renewals in FY17
- 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.
Stable leverage ratio
- 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