Keppel REIT - RHB Research 2015-10-20: Occupancy Rates Decline

Keppel REIT - RHB Research 2015-10-20: Occupancy Rates Decline KEPPEL REIT K71U.SI 

Keppel REIT - Occupancy Rates Decline

  • Keppel REIT’s 9M15 DPU met ~73% of our full-year estimate, at 10.5% lower than the year before. Maintain SELL, with a TP of SGD0.86 (14% downside). 
  • Its overall portfolio occupancy rate dipped to 98.5%, mainly due to the closure of SCB’s equity business in MBFC Tower 1. 
  • We kept our SELL rating, as Keppel REIT is still one of the highest-geared REITs within the sector (42.6%), while it grapples with headwinds in the office rental market. 

 3Q15/9M15 DPU declines 8.1/10.5% YoY. 

  • Keppel REIT’s 9M15 results were in line with our expectation as 9M15 distribution per unit (DPU) declined 10.5% YoY, meeting ~73% of our full-year estimate. The REIT achieved an average 16% positive rental reversion for 9M15 (1H15: 18%). The decline in DPU was mainly attributable to the divestment of Prudential Tower on 26 Sep 2014. 

 Occupancy dropped mainly due to closure of Standard Chartered Bank’s (SCB) equity business. 

  • Recall that SCB announced that it was shutting down its equities business in January. The bank returned the space in Marina Bay Financial Centre (MBFC) Tower 1 to the REIT in the last quarter, which caused its portfolio occupancy rate to dip to 98.5% from 99.3%. We learnt from management that there will not be any further decline in occupancy rates relating to the closure of SCB’s equity business. 

 Impacted by the weakening AUD. 

  • The REIT’s Australian assets with direct rentals registered a negative 9M15 revenue YoY growth of 7.7- 8.2% following the weakening of the AUD. Keppel REIT stated that it has hedged almost 100% distributable income from Australia for the remainder of 2015. Its sensitivity analysis stated that its NAV would drop by 2 cents and gearing could rise by 0.3%, should AUD1.00 trade at SGD0.95 (currently AUD1.00 = SGD1.01). 

 Maintain SELL. 

  • Since we expect further headwinds in the office rental market in the coming years, we remain cautious as 28.4% of its portfolio NLA faces lease expiries in the next two years. We reiterate our SELL recommendation, while our DDM-based SGD0.86 TP remains unchanged. 

Ivan Looi RHB Securities | Ong Kian Lin RHB Securities | http://www.rhbgroub.com/ 2015-10-19
RHB Securities SGX Stock Analyst Report SELL Maintain SELL 0.86 Same 0.86