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.

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.

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.

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.

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