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

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. 
  • Maintain Add, with DDM-based target price of S$1.15. 

■ Good underlying performance 

  • 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). 

■ Increase in leasing appetite from new and expansion sources 

  • 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. 

■ Focus on tenant retention 

  • 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. 

■ Limiting impact of rising interest rates and forex volatility 

  • 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. 

■ Maintain Add 

  • 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