Keppel REIT - CIMB Research 2015-12-09: Focus on leasing and retention activity

KEPPEL REIT K71U.SI

Keppel REIT - Focus on leasing and retention activity

KREIT displayed good underlying performance in 2015, with 9M15 distributable income rising 2% yoy.
Focus on tenant retention, with portfolio occupancy fairly stable at 98.5% and 16% positive rental reversion in 9M15.
Almost all FY15 renewals have been completed. Only 36% of leases are due to be re-contracted/reviewed over the next two years.
Limited refinancing risk, A$ income hedged until 1Q16.

KREIT’s 9M15 distributable income rose 2% yoy due to better performance by Ocean Financial Centre (OFC), Bugis Junction Towers and 8 Chifley Square in Sydney. The improvements offset the income vacuum resulting from the sale of Prudential Tower in 3Q14 and the absence of income support from Marina Bay Financial Centre 1 (MBFC 1).

The trust leased 470,000 sq ft of space in 3Q15, keeping portfolio occupancy fairly stable at 98.5% (vs. 99.3% in 2Q) and achieving 16% positive rental reversion.
Of the new leases secured, around 1/3 were new tenants for KREIT, 1/3 were expansion leases and the remaining 1/3 were tenants setting up presence in Singapore. These are largely Asia-based companies in the financial services, commodities and real estate sectors.

Looking ahead, the trust intends to focus on tenant retention amid rising incoming supply in the next 2-3 years. It has renewed/reviewed almost 100% of leases due in FY15 and only 20.8%/15.9% of renewal/review leases remain to be re-contracted in FY16/FY17.
Current market rents are above expiring levels but stiff competition for tenants means that the trust could see positive but narrower rental revision spreads.
Management said the bulk of the 100,000 sq ft space returned to date has been re-leased.

Although its net gearing of 42.6% at end-Sep is one of the highest among its peers, the trust has taken steps to limit the negative impact of rising interest rates, with 72% of its borrowings comprising fixed rate loans and very little refinancing due before 2017.
It has hedged almost 100% of its distribution payment from Australia until 1Q16.

We believe that much of the dampened office market sentiment is already reflected in the share price.
We maintain Add, with an unchanged DDM-based target price. The stock offers FY15/FY16 DPU yields of 7.3%.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.15 Same 1.15