Little surprise
- 2Q15 DPU of 1.72 SGD cts (-9.5% YoY, +1.2% QoQ) in line. Strong rental reversion of +18% for leases signed in 1H15.
- Leverage and interest cost remain stable with no plans to raise equity. Market weakness could pose downside to our market rent assumptions and SGD1.32 TP.
- With 80% of leases not due for renewal until 2017 and beyond, we expect KREIT to ride out the current market weakness and maintain our BUY rating.
What’s New
- Keppel REIT reported 2Q15 DPU of 1.72 SGD cts (-9.5% YoY, +1.2% QoQ), in line with expectations.
- It achieved strong rental reversion of +18% for the 390,000 sf of space signed in 1H15. This was due to the expiry of low underlying rents that were signed during the GFC.
- Aggregate leverage and all-in financing cost remain stable at 42.6% (1Q15: 42.4%) and 2.50% (1Q15: 2.47%) respectively.
- Despite having one of the highest gearing in the sector, management has no plans to raise equity in the near term and also believes its leverage is unlikely to cross the new 45% regulatory limit.
- Foreign exchange risk is low as nearly all its distributable income from Australia had been hedged for the remaining of 2015.
- It will seek to hedge its 2016 exposure in the coming months.
What’s Our View
- There was little surprise in the latest set of results.
- However, we see softening demand for prime office space, with consultants highlighting weakness in the market.
- This poses risks to our current market rent expectations of +6%/-6%/+3% for FY15E-17E.
- Hence, we see downside to our market rent assumptions and will recalibrate our DPU forecasts and SGD1.32 DDM TP (COE 7.7%, TG 2.0%) post-results season.
- That said, with 80% of its leases not due for renewal until 2017 and beyond, we expect KREIT to ride out the current market weakness and maintain our BUY rating.
(Derrick Heng, CFA)
Source: http://www.maybank-ke.com.sg
