Keppel REIT - CIMB Research 2016-01-19: Muted outlook priced in

KEPPEL REIT K71U.SI

Keppel REIT - Muted outlook priced in

Results in line with market estimates.
Achieving slightly positive rental reversions in 4Q.
Tenant retention is key focus in FY16 with expiring leases currently under advanced negotiations.
Sale of Sydney property at a premium to book, should unlock value as well as pare down gearing.

Keppel REIT (KREIT) reported 4Q15 distribution income of S$54m and DPU of 1.68 Scts (+11.3% yoy), thanks to higher income from MBFC3, 8 Chifley Square and an office tower in Perth.
This more than offset a relatively flat topline, absence of rental support from OFC and MBFC1 as well as higher interest cost.
On a full-year basis, FY15 DPU of 6.8 Scts was 6% lower yoy and formed 99% of our forecast due to income vacuum from the sale of Prudential Tower and a weaker A$.

Notably, KREIT renewed 480,000sf of NLA in 4Q at positive single digit reversions over previous levels. An estimated 80% of the leases are new to KREIT/Singapore and the balance from renewal/expansion activities. There was robust demand from TMT tenants including names such as Netflix. For FY15, it achieved an average 13% positive rental reversion across its portfolio.

Going into FY16-17, KREIT has 16.7% and 14.8% of leases to be re-contracted. It is in advanced negotiations for leases expiring this year and guided that it is likely to achieve a high retention rate.
Given the current competitive rental market and the large incoming supply of new inventory, we expect market rents to dip by 10% this year.
KREIT’s expiring rents are 10-15% below current market levels and we expect these renewals to be relatively neutral to earnings.

KREIT revalued its portfolio at end FY15 and clocked in a S$197m revaluation surplus and lowered gearing to 39.3%.
The recent sale of the 77 King St property in Sydney for A$160m, or at a 27% premium to its latest book value, will lower its leverage ratio by a further 1-2% pts in addition to unlocking value.
KREIT will recognise a A$28m gain, which is factored into our FY16 estimates.

Overall, we raise our FY16 DPU estimates by 16% but pare down FY17 DPU by 4.3% to factor in the A$28m divestment gain and additional interest cost from the issue of S$150m perpetual securities.
Thus, we lower our DDM-based target price by 6% to S$1.08. KREIT is trading at 0.61x P/BV and offers investors a normalised (excluding divestment gain) DPU yield of 8%.
At this level, we believe much of the weak office market outlook has been priced in and maintain our Add rating.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-01-19

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.08 Down 1.15