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.

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.

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.

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.

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.

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