Keppel REIT - RHB Research 2015-12-02: Aggressively-Leveraged Office REIT

Keppel REIT - RHB Research 2015-12-02: Aggressively-Leveraged Office REIT KEPPEL REIT K71U.SI 

Keppel REIT (KREIT SP) - Aggressively-Leveraged Office REIT 

  • Maintain SELL, with a lower DDM-derived TP of SGD0.83 (11% downside). 
  • We maintain our pessimistic outlook on the office rental market as we have concerns over the c.4.3m sq ft office supply glut next year. 
  • As Keppel REIT could have among the biggest number of office leases expiring in 2016, we believe it would most likely be the most impacted compared to its peers. 
  • In addition, it is the most aggressively-leveraged player within the SREIT space. 

 Pessimistic outlook for the office rental market. 

  • We expect the office leasing market to remain challenging as supply-demand dynamics remain depressed. Data from CBRE indicates that office rentals corrected 3.5% QoQ to SGD10.90psf/month in 3Q15. 
  • We estimate office rental rates to decline 15% from a peak of SGD11.40psf/month in 1Q15, by end-2016. 
  • Meanwhile, we also take note of a shift in demand from the banks and technology companies as these large corporations are consolidating their operations to business parks. 

 Huge chunk of office leases expire in 2016. 

  • Keppel REIT faces major lease expiries amounting to over 567,000 sq ft of net lettable area (NLA), or about 16% of its total NLA, compared to peers like Capitaland Commercial Trust (CCT SP, SELL, TP: SGD1.15) and Suntec REIT (SUN SP, SELL, TP: SGD1.31) which are facing lease expiries comprising 10% and 15% of their respective portfolio. 
  • In view of this, Keppel REIT could potentially be the most negatively impacted by the office supply glut. 

 Highest gearing ratio within the office SREITs sector. 

  • As of 3Q15, Keppel REIT is the one of the most aggressively-leveraged REITs within the SREIT sector. At a 42.6% gearing level, it is treading on the possibility of recording narrow margins from the maximum leverage ratio of 45.0%, which is expected to be implemented by the Monetary Authority of Singapore (MAS) by the beginning of 2017. 

 Maintain SELL with a lower DDM-derived TP of SGD0.83. 

  • In view of the above factors, we believe that Keppel REIT could face more challenges over the next two years.

Ivan Looi RHB Securities | Ong Kian Lin RHB Securities | http://www.rhbgroub.com/ 2015-12-02
RHB Securities SGX Stock Analyst Report SELL Maintain SELL 0.83 Down 0.86