DBS Group Research 2015-07-21: Keppel REIT - Maintaining a defensive portfolio. Maintain BUY.

Maintaining a defensive portfolio 

  • 2Q15 DPU of 1.72Scts in line (+1% q-o-q; -9% y-o-y) 
  • Leasing activity for 2015 almost complete; c.80% of leases by NLA extended to 2017 and beyond 
  • Key focus will be on tenant retention, occupancy rates, and re-letting of returned spaces 
  • Maintain BUY, TP S$1.32. 


Results in line. 

  • KREIT reported 2Q15 distribution income of S$55m (+3% y-o-y) supported by 
    1. contribution from newly acquired MBFC Tower 3, 
    2. higher income from Ocean Financial Centre (OFC) and Bugis Junction Towers (BJT) and 
    3. the Manager’s election to receive 100% of management fees in units. 
  • These offset the decline in income stemming from the divestment of Prudential Tower and the cessasion of income support at OFC. 
  • DPU fell 9% y-o-y to 1.72Scts, on an expanded share base following an equity fund raising exercise to partially fund the acquisition of MBFC Phase 3. 

Minimal debt refinancing risk in 2015/2016.

  • Debt expiry profile was extended from 3.1 to 3.9 years (one of the longest among S-REITs), at an all-in interest cost of 2.5%. 
  • At this point in time, the Manager is fairly comfortable with its current gearing of 42.6%. 
  • The Manager has hedged almost all of its AUD distributable income for FY15 at an average rate of S$1.08. As the hedges begin to roll over in the coming quarters, we could see some downside in AUD distributions from FY16 onwards. 


390k sqft of space leased out at average reversions of 18%. 

  • The Manager has leased out almost all spaces expiring in FY15, with only < 3% up for renewal or review. 
  • The Manager has already begun engaging with tenants for the 22% of NLA due in FY16, which will largely come from BJT and OFC. 
  • While this number appears fairly substantial at first glance, we take comfort from the fact that Keppel Land’s lease at BJT accounts for a substantial portion of renewals, and risk of vacancy is thereby lowered. 
  • While the Manager has successfully re-leased all of the returned spaces as of 1H15, it anticipates more spaces being returned in 2H15, with KREIT’s effective exposure < 100k sqft for FY15. 
  • Given its young portfolio and prime location in Raffles Place and Marina Bay, we believe that KREIT should be able to fill these spaces relatively quickly. 


  • Our target price of S$1.32 is based on the discounted cash flow (DCF) model, as K-REIT generates recurring rental income from tenants. 
  • At the current price; K-REIT offers investors about 6.2-6.3% dividend yield for FY15/16
  • We have a BUY recommendation

Key Risks: 

Interest rate risk. 

  • Any increase in interest rate will result in higher interest payments that the REIT has to make annually to service their loans. This reduces the income available for distribution, which will result in lower distribution per unit (DPU) for unitholders. 

Currency risk. 

  • As income for S-REITs is distributed in Singapore dollars, any income derived in a foreign currency will have to be exchanged into SGD. 
  • As K-REIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in relatively lower contributions from Australia to K-REIT's total distributable income. 

Economic risk. 

  • A deterioration of the economic outlook could have a negative impact on office rents, which have a strong historical correlation with GDP growth.

(Rachael TAN, Derek TAN)

Source: http://www.dbsvickers.com/