2Q15: Results Of Both Keppel REIT And Cache Logistics Trust In Line With Expectations
- Maintain BUY on Cache with an unchanged target price of S$1.35.
- Multi-tenancy conversion contributed towards a slight decline in DPU, despite top-line growth.
- Management is looking overseas for growth as logistics space prospects in Singapore remain dim due to the impending oversupply.
- Maintain BUY on Keppel REIT with an unchanged target price of S$1.42.
- New leases and renewals recorded positive reversion of 18% on average in 2Q15 with rent renewals exceeding implied rents post income support expiry.
- Maintain MARKET WEIGHT.
WHAT’S NEW
Cache Logistics (CACHE) and Keppel REIT (KREIT) reported their quarterly results.
ACTION
Keppel REIT (K-REIT SP/BUY/S$1.125/Target: S$1.42)
• Results in line.
- Keppel REIT (KREIT) reported a 2Q15 DPU of 1.72 S cents, down 9.5% yoy, in line with our expectations with 1H15 DPU at 49.2% of full year estimates.
- High occupancy in Singapore (99.5%) coupled with Australia’s occupancy rate of 98.2%, resulted in an overall occupancy rate of 99.3%.
- Overall financing costs remained stable at 2.5% with gearing at 42.6%. 65% of total borrowings have been fixed to mitigate interest rate volatility.
- The tenant retention rate remained healthy at 84% in 2Q15.
• Rent renewals exceed implied rents post income support expiry.
- The distributable income grew 3% yoy in 3Q15 despite the absence of rental support from MBFC phase One, Ocean Financial Centre and divestment of Prudential Tower.
- We understand from management that negative rent reversions are unlikely as there is a 10-20% room for the office rents to fall before rental reversions turn negative.
• New leases and renewals recorded positive reversion of 18% on average in 2Q15.
- KREIT successfully signed, renewed, forward renewed and reviewed approximately 390,000 sf of office space with a positive rental reversion of 18% (5-33% range) on average.
- This brings the total leases in the portfolio not due for renewal till 2017 and beyond to 80%. Bulk of the 20% due from renewal consists of own space and related entities (KeppelLand, Alpha).
• KREIT embarked on maiden Distribution Reinvestment Plan (DRP)
- KREIT embarked on maiden Distribution Reinvestment Plan (DRP) scheme for the 2Q15 distribution to strengthen KREIT’s balance sheet, enhance working capital reserves and improve the liquidity of the Units.
- The DRP provides unitholders the option to receive distributions in the form of units, without incurring additional costs.
• 2Q15 signalled the end of a good run; expect healthy moderation before pick-up.
- In 2Q15, Grade-A office rentals saw downward easing of 0.9% qoq to hit S$11.30 psf pm, as core CBD vacancy saw a dip of 8bp qoq to 3.8%
- This marked the end of six quarters of consecutive growth office rents enjoyed from 4Q13 to 1Q15.
- Office rental growth moderated from 3-5% per quarter in 1Q14- 3Q14 to about 2% per quarter in the past two quarters (4Q14 and 1Q15).
- We expect 2H15 rents to remain stable as the next surge of office supply will only arrive in 2H16/2017.
- Beyond 2017, the supply remains meagre at below 0.6m sf.
• Perth Old Treasury Building construction is on track.
- The Government of Western Australia is expected to commence its 25-year lease in this strategic landmark in Perth’s central business district in 4Q15. There is room for cap rate compression with valuation cap rates of 6.7-6.8% vs recent transaction cap rates of below 6%.
• Maintain BUY
- Maintain BUY with an unchanged target price of S$1.42 based on DDM (required rate of return: 7.1%, terminal growth: 2.2%).
Cache Logistics Trust (CACHE SP/BUY/S$1.16/Target: S$1.35)
• Results in line.
- Cache Logistics (CACHE) reported a 2Q15 DPU of 2.14 S cents, a decline of 0.4% yoy, in line with our expectations with 1H15 DPU at 49.5% of full year estimates.
- Despite a 3.7% increase in gross revenue yoy, NPI declined by 5.4% due to a 150.5% increase in property expenses. This was mainly attributable to increases in land rent, property taxes and maintenance expenses with the loss of triple-net lease post multi-tenanted conversion of master leases this quarter.
- Occupancy slid 0.8ppt qoq to reach 98.3% this quarter
• Keeping an eye out on growth overseas.
- As evidenced by its recent Australian acquisitions, management has expressed a growing willingness to expand overseas.
- Management continues to state their expectations of continued weakness on the leasing front, on the back of increased supply.
- Cache has not ruled out the possibility of a continued pursuit of Australian asset acquisitions.
- Supposing a gearing level of 40%, debt headroom of about S$49.1m exists to support inorganic growth.
• No refinancing is required until 2017.
- In addition, about 67% of borrowings have been hedged against interest rate risks. Management has stated its comfort in pushing gearing just past 40%.
- Within the sponsor ROFR pipeline, we think CWT Logistics Hub 1 might potentially appeal to Cache as a potential acquisition candidate.
• Leasing in 2015 taken care of.
- The bulk of 2015’s expiring leases have been forward renewed, with a paltry 2% by NLA left. The following year will see three master leases expiring, mostly accounting for the 15% of expiring leases by NLA in 2016.
- Management is currently in negotiations on forward renewals, expressing confidence in the quality of their locations within eastern Singapore.
• Biting the bullet in Singapore.
- Management noted that the outlook for warehousing remained gloomy, expecting rentals to start picking up only at end-16.
- 1Q15 JTC figures supported the case for an occupier’s market as vacancy rates crept up 1.8 ppt qoq and 1.1 ppt yoy to hit 10.0% in 1Q15.
• Maintain BUY
- Maintain BUY with an unchanged target price of S$1.35/share based on two-stage dividend discount model (required rate of return: 6.8% and terminal growth rate: 1.8%).
PEER COMPARISON
(Vikrant Pandey, Derek Chang)
Source: http://research.uobkayhian.com/
