REITS - UOB Kay Hian 2015-10-20: 3Q15: Results For Keppel REIT And Mapletree Logistics Trust Are In Line With Expectations

REITS - UOB Kay Hian 2015-10-20: 3Q15: Results For Keppel REIT And Mapletree Logistics Trust Are In Line With Expectations REIT KEPPEL REIT K71U.SI  MAPLETREE LOGISTICS TRUST M44U.SI 

REITs − Singapore 3Q15: Results For Keppel REIT And Mapletree Logistics Trust Are In Line With Expectations 

  • Maintain BUY and target price of S$1.22 for Keppel REIT. A well spread-out lease expiry profile should stand it in good stead to weather stormy times. 
  • Maintain BUY and target price of S$1.2 for MLT. As the industrial segment in Singapore slows down, management continues to look overseas for growth with Japan and South Korea as possible target markets. 
  • Maintain OVERWEIGHT. 


WHAT’S NEW 

  • Keppel REIT (KREIT) and Mapletree Logistics Trust (MLT) reported their quarterly results. 


ACTION 


Keppel REIT (K-REIT SP/BUY/S$1.00/Target: S$1.22) 


• Results in line. 

  • KREIT reported 3Q15 DPU of 1.70 cents, down 8.1% yoy from the dilutive effects of unit placement to finance the MBFC acquisition. 9M15 DPU at 74.2% of our full-year estimate. Maintain BUY and target of S$1.22, based on DDM (required rate of return: 7.1%, terminal growth: 1.7%) 

• Operational highlights. 

  • Overall occupancy declined marginally in 3Q15 to 98.5% (2Q15: 99.3%) as occupancy in Singapore (98.8%) and Australia (97.3%) dropped 0.7ppt and 0.9ppt respectively. Overall financing costs remained stable at 2.5% with reported headline gearing at 42.6%. Fixed borrowings made up 72% (65% previous quarter) of total debt to mitigate interest rate volatility. 

• Well spread-out expiry profile as incoming supply hits. 

  • About 16.3% and 12.1% of leases by NLA are due to expire in end-16 and 2017 respectively when the bulk of supply from Guoco Tower (1.3m sf in 2016), Marina One and Duo (2.4m sf in 2017) stream in 

• New leases and renewals recorded positive reversion of 16% on average in 3Q15. 

  • KREIT successfully signed, renewed, forward renewed and reviewed about 470,000sf of office space (2Q15: 390,000sf) with positive rental reversions of 16% on average. Interestingly, the banking and financial sectors took up less space (47.5% vs 48.2% in 2Q15) with leasing expansion largely from the legal, commodities and TMT sectors. 
  • Management noted an increasingly challenging environment ahead, and will step up efforts in tenant retention (90% in 3Q15) and engagement. 

• Expect healthy moderation before pick-up. 

  • According to CBRE, Grade-A office rentals eased a further 3.6% qoq in 3Q15 to hit S$10.90psf pm (2Q15: -0.9% qoq). Marina One (1.9m sf), which is slated to hit the market in 2016, has yet to see any pre-commitment although industry consultant DTZ posited that Marina Bay rents fell 5.5% qoq to S$13psf pm in 3Q15. The next surge in office supply will only arrive in 2H16/2017, which could result in a further 5-10% correction in rents. 
  • Beyond 2017, the supply remains meagre at below 0.6m sf and this should lead to a pick-up in rental growth. The bulk of KREIT’s lease expiries (about 70% by NLA) are due in 2018 when supply remains tight. 


Mapletree Logistics Trust (MLT SP/BUY/S$1.04/Target: S$1.28) 


• Results in line; maintain BUY and target of S$1.28


  • Results in line; maintain BUY and target of S$1.28, based on DDM (required rate of return: 6.9%, terminal growth: 1.5%). 
  • MLT reported 2QFY16 DPU of 1.86 cents, down 1.1% yoy, in line with our expectation, with 1HFY16 DPU at 48.7% of our full-year estimate. 

• Operational highlights. 

  • Overall occupancy rate saw a slight uptick to 96.9% (1QFY16: 96.3%) as more space was taken up in recently converted multi-tenanted buildings (MTB). Overall financing costs inched up again at 2.3% (1QFY16: 2.2% with gearing at 38.8%. About 81% of total borrowings have been fixed to mitigate interest rate volatility. About 3% of borrowings are due this financial year. 
  • Successful forward renewals of expiring leases in FY16 have led to a remaining 23% of leases by NLA due to expire in the next two quarters. Rental reversion of 3% moderated slightly from 1QFY16’s 5%. 

• Gearing up…

  • MLT’s gearing currently stands at 38.8% after the completion of acquisitions in Australia, South Korea and Vietnam, all of which were fully debt-funded. We note this is higher than the previous guidance of 38.2% due to forex movements (yen and HK dollar-denominated debt). 
  • We believe this should leave MLT with about S$117.8m of debt headroom, assuming a comfortable gearing level of 40%. Management will also continue with its capital recycling activities through the divestment of non-performing assets (134 Joo Seng and 20 Tampines) so that potential acquisitions can be internally and debt financed as opposed to raising equity. 

• ..for overseas drive. 

  • MLT currently derives about 64.3% of overall asset value from overseas assets, post the recent completion of overseas acquisitions in Australia, South Korea and Vietnam. Management intends to continue pursuing growth beyond domestic shores and eventually increase its overseas exposure to 75%. 
  • Management also highlighted target markets such as Japan and South Korea, pointing out strong demand for leasing space in the lead-up to the Olympics in Japan, and thirst for Grade-A warehousing among South Korea’s retailers. 

• Gloomy domestic outlook. 

  • Despite stabilising leasing activities in Asia, management continues to guide for moderate rental reversions. The resulting downward pressure on NPI margins from expiring SUA’s amid the bleak outlook in Singapore should be somewhat mitigated as MLT continues along the footpath beyond domestic shores. 


Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.22 Same 1.22
BUY Maintain BUY 1.28 Same 1.28


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