Keppel REIT - CIMB Research 2016-04-14: Reducing renewal risks

Keppel REIT - CIMB Research 2016-04-14: Reducing renewal risks KEPPEL REIT K71U.SI 

Keppel REIT - Reducing renewal risks 

  • Higher contributions from OFC and income top-up filled vacuum from 77 King St sale. 
  • Active leasing and tenant retention strategy kept portfolio occupancy at 99.4%, lowers lease expiries to 3% for rest of FY16. 
  • Enjoyed an average 7% positive reversion for 430ksf of space renewed or leased. 
  • Balance sheet healthy with no debt refinancing till 2H17. 
  • Maintain Add and target price of S$1.08. 

1QFY16 results broadly in line 

  • Keppel REIT’s (KREIT) 1QFY16 results were broadly within expectations. 
  • Topline was 2.9% lower yoy to S$41.2m due to income vacuum following the sale of its 77 King St property and slightly lower contributions from other Australian assets due to a yoy weaker A$. 
  • This was partially offset by higher contributions from Ocean Financial Centre (OFC) and distribution income top-up of S$3m. 
  • Portfolio occupancy remained high at 99.4%. 
  • Distribution income rose slightly to S$54.4m, translating to a DPU of 1.68 Scts. 

Proactive leasing strategy kept portfolio occupancy high 

  • The group adopted a proactive leasing strategy and leased 430ksf of space in 1Q, achieving a retention ratio of 99% and an average positive rental reversion of 7%. 
  • The bulk of demand came from renewal activities while new appetite came from the legal and financial sectors. This reduced its remaining lease expiries to 3% for 2016 and 11.5% in FY17. 

Asset divestment gains to moderate earnings downside risks 

  • The incoming supply of office space would continue to be a drag on market rental outlook. 
  • Management said its average rents for leases expiring in 2016-18 range from S$8.50-9psf, below current spot rents of S$9.90psf. 
  • We project a 10% drop in 2016 market rents. Hence, we believe KREIT may continue to enjoy positive reversions for expiries this year and see neutral to slightly negative impact next year. 
  • Nonetheless, we think payout of asset divestment gains would moderate any downside risks. 

Robust balance sheet 

  • KREIT’s balance sheet remains healthy at 39% gearing and no refinancing requirements till 2H17. 
  • With 75% of its interest cost fixed, we expect cost of funding to remain fairly stable at 2.58%. 
  • It has also hedged all its forecasted distribution payout from Australia for 2016. 

Maintain Add 

  • We revise our FY16 DPU estimates to 6.9 Scts as we exclude the divestment gains from 77 King St. 
  • Our DDM-based target price of S$1.08 remains unchanged. 
  • At this level, KREIT offers investors FY16F DPU yield of 6.9% and total return of c.15%. 
  • Maintain Add.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-04-14
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.08 Same 1.08