Keppel REIT - UOB Kay Hian 2016-01-19: 4Q15 ~ Rising Tech Demand Stems Finance Outflow

KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) 4Q15: Rising Tech Demand Stems Finance Outflow

Rising demand for space from the telecommunications, media and technology (TMT) sector, coupled with a well-spread out lease expiry profile, has left management cautiously optimistic in the face of an upcoming surge in commercial space.
Aggregate gearing dropped to 39.3%, while portfolio occupancy remained healthy at 99.3% with positive rental reversions of 13% noted for the full year.
Maintain BUY with an unchanged target price of S$1.22.

Keppel REIT (KREIT) reported 4Q15 DPU of 1.68 S cents/share (11.3% yoy, -1.2% qoq). Distributable income growth was mainly due to contributions from its one-third stake in MBFC Tower 3, as well as healthier performance from Bugis Junction Towers and Ocean Financial Centre.
Results are in line with our expectations (98.6% of our forecast).

... coupled with Australia’s occupancy rate of 99.2%, resulted in an overall occupancy rate of 99.3%.
Keppel REIT maintained a high tenant retention rate of 90% a 13% positive rent reversion for its Singapore portfolio for the whole of 2015 (single-digit positive rental reversion in 4Q15).

..., a level not seen since 3Q11. KREIT’s high gearing, long a bugbear to investors, was reduced from 3Q15’s 42.6% through a combination of perpetual security issuance and revaluation gains.
Assuming that net gains from the announced divestment of 77 King Street (further details below) are fully used to further pare down debt, we estimate that this would shave off 1.2ppt in aggregate leverage to reach 38.1%.
Overall financing costs remained stable at 2.5%, as 70% of total borrowings have been fixed to mitigate interest rate volatility.

The latest quarter saw the telecommunications, media and technology (TMT) sector accounting for approximately 50% of new leases signed.
New tenants in the quarter include online media giant Netflix, which recently flagged off the official launch of its streaming services locally.
The TMT sector now accounts for about 11% of space leased, up from 10.2% in the previous quarter as the banking, insurance and financial sector saw its share slip 2.5ppt qoq to reach 45% in the quarter.
Management assured that no incentives were dangled to entice these new entrants, even as they took on leases for periods for as long as five years.
For the full year, the take-up remained healthy with about 50% of the 114 leases concluded for 1.6m sf of space being new to Singapore (25%) and expansionary (25%) in nature.

KREIT has forward renewed the bulk of expiring leases due in 2016 and 2017, with 13.6% and 11.0% by NLA remaining respectively, when most of the commercial supply from Guoco Tower (1.3m sf in 2016), Marina One and Duo (2.4m sf in 2017) stream in.
New leases and renewals recorded positive reversion of 13% on average in 2015, with a high tenant retention rate of 90% maintained for the full year.
Management displayed stoic optimism, noting that the passing rents of expiring leases due this year, between S$8-9 psf pm, were below that of average Grade-A rentals of S$10.40 psf pm in 4Q15. This may likely provide KREIT with better odds in weathering the brunt of the upcoming surge in commercial supply.

We note that the latest valuation comes unchanged from 2014's valuation exercise which placed 77 King Street's asset value at A$126m.
Based on the asset’s original acquisition price of A$116m at end-10, the divestment price comes at an approximately 40% premium. However, taking into account the 17.4% depreciation of the Australian dollar during the period, the effective gain in SGD terms over the original purchase price comes to 10.3%.

Maintain BUY with an unchanged target of S$1.22, based on DDM (required rate of return: 7.1%, terminal growth: 1.7%).

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-01-19

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.22 Same 1.22