Keppel REIT - CIMB Research 2015-10-19: Focus on leasing and retention activity

KEPPEL REIT K71U.SI

Keppel REIT - Focus on leasing and retention activity

3Q DPU at 1.7 Scts, making up 24.8% of our full-year forecast.
Focus on tenant retention, with portfolio occupancy remaining fairly stable at 98.5% and achieving 16% positive rental reversion.
Almost all FY15 renewals completed; only 36% of leases to be re-contracted/ reviewed over the next 2 years.
Limited refinancing risk, A$ income hedged till 1Q16.
Upgrade from Hold to Add on valuations with DDM-backed target price of S$1.15.

KREIT reported 8.1%/10.5% yoy declines in 3Q15/9M15 DPU to 1.7 Scts/5.1 Scts respectively. The decline was due to an income vacuum from the sale of Prudential Tower in 3Q14 and absence of income support from MBFC1 and 87.5% of OFC. This was partly offset by higher contributions from Bugis Junction and OFC, as well as greater associates and JV contributions.

The trust leased 470,000sf of space in 3Q, keeping portfolio occupancy fairly stable at 98.5%. (vs. 99.3% in 2Q) and achieving a 16% positive rental reversion. Of the new leases secured, 1/3 were new tenants to KREIT, 1/3 from expansion leases, and the remaining from tenants setting up presence in Singapore. These are largely Asia-based and from the financial services, commodities and real estate sectors.

Looking ahead, the trust’s focus would be on tenant retention amid the incoming supply in the next 2-3 years. It has renewed/reviewed almost 100% of FY15 leases due and will only have 20.8%/15.9% of renew/review leases due to be re-contracted in FY16/FY17.
While current market rents are still above expiring levels, stiff competition for tenants means the trust could see positive but narrower rental reversion spreads. Management also said the bulk of the 100,000sf of space returned to date has been re-leased at present.

Although its gearing at 42.6% is one of the highest amongst its peers, the trust has taken steps to limit the impact of rising interest rates with 72% of its borrowings on fixed rate loans, and very little refinancing due till 2017. It has hedged almost 100% of its distribution payment from Australia till 1Q16.

We have tweaked down our FY16 and FY17 DPU estimates marginally by 0.6-1.4% and adjusted our DDM-backed target price to S$1.15. However, KREIT’s share price has fallen significantly over the past quarter, and much of the dampened office market sentiment is reflected in the stock price. Hence, we are raising our recommendation to Add. The stock offers an FY16 DPU yield of 6.9%.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-10-19

CIMB Securities SGX Stock Analyst Report ADD UPGRADE HOLD 1.15 Down 1.20