Keppel REIT - Maybank Kim Eng 2016-01-19: Results in–line; Still a difficult year ahead

KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) Results in–line; Still a difficult year ahead

Reiterate our HOLD rating on KREIT as we continue to see a difficult year ahead.
Singapore’s office market has just tipped over and we do not see a recovery near term.
While efforts to deleverage its balance sheet will address investor concern, we continue to forecast falling DPUs and see no reason to raise exposure, despite a cheap valuation.

Our TP remains unchanged at SGD0.88, at FY16E target yield of 7.50% (from 7.25%).

Keppel REIT announced 4Q15 DPU of 1.68 SGD cts (-1.2% QoQ, +11.3% YoY), in-line with expectations. Note that 4Q15 distributions include SGD6m of capital distributions from sales proceeds of Prudential Tower.
Including proceeds from its impending divestment of 77 King Street, it has c.SGD60m that could be distributed to unitholders.
We build in annual distribution of SGD15m and lift our DPU by 3-5%.

Aggregate leverage declined to 39.3% (3Q15: 42.6%) due to repayment of borrowings using proceeds from the SGD150m perpetual securities and higher valuation of its assets.
Leases due for renewal have low passing rents of SGD8 to low-SGD9 psf pm (2016: 13.6%, 2017: 11.0%), per management guidance. Hence, it may still achieve positive rental reversion.
Low cap rates supported fair value gains of SGD197.2m in 4Q15. Despite the challenging market conditions and interest rate hike, cap rates used in the valuation of its Singapore properties remain unchanged at 3.75%. Cap rates used for its Australia assets tightened to 6.15% from 6.7% last year.
TMT tenants appear to be picking up the slack to account for half of new leases signed in 4Q15.

KREIT also announced the divestment of 77 King Street, Sydney for AUD160m. It expects to book divestment gain of AUD28m as the sale price is 27% higher than its latest valuation.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-19

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.88 Same 0.88