Office REITs - Maybank Kim Eng 2016-04-22: Results Round Up

OFFICE REIT CAPITALAND COMMERCIAL TRUST C61U.SI KEPPEL REIT K71U.SI SUNTEC REAL ESTATE INV TRUST T82U.SI

Singapore Office REITs – results round up

1Q16 results for the office REITs were in line.
We note that occupancies held up well despite weak market conditions, but they were achieved at lower signing rents in general.
We stay cautious on office REITs as the sector has just tipped over and is unlikely to bottom until 2018. Despite impending headwinds in the physical market, we see support for REIT prices from the recent decline in interest rates.

Occupancy levels at CCT and KREIT held up well despite the weak market conditions. This is commendable considering the negative islandwide net absorption of 133.5k sf reported by CBRE. However, this was achieved at broadly lower rents albeit still with positive reversions.
Occupancy for offices at Suntec City dipped slightly, but is still healthy. Going forward, we expect this resilience to be tested as a large amount of new office space gets completed.
Pre-commitment at Guoco Tower remains low at 18%. While no official commitment levels at Marina One and Duo were announced, it is widely expected to be fairly low as well.
Keeping the large supply pipeline in mind, landlords had been proactive in renewing their leases due this year.
KREIT, in particular, brought down its 2016 exposure by over 10ppt in just one quarter.
Overall, the lease expiry profiles for office REITs are fairly manageable with exposure limited to 3- 8% and 12-20% in 2016 and 2017 respectively.

We continue to believe that investors should differentiate between underlying operating income and capital distributions.
To support headline yields, Keppel REIT has distributed proceeds from the sale of Prudential Tower for the third consecutive quarter. Suntec REIT cushioned the loss of income from Park Mall with more capital distribution. We opine that CCT’s yield is most reflective of its underlying property performance with growth driven by better performance at Raffles City and maiden contribution from CapitaGreen.

Financing costs remain fairly stable with all-in interest cost increasing by 10-39bps YoY.
CCT announced that it has secured financing for its Raffles City Singapore (RCS) debt due in June, while Suntec REIT should refinance all its debt due in 2016 this quarter. CCT and KREIT locked in a larger portion of their interest costs and now have 91% and 75% on fix rates.
With a smaller 66% of its debt fixed, Suntec REIT will benefit more from a decline in interest rates.
With the strongest balance sheet amongst its peers, CCT has the most capacity to grow inorganically with low aggregate leverage of just 30%. Suntec REIT’s leverage is stable at 36%.
While KREIT deleveraged further by paying down debt and selling off 77 King Street, it is important to note that its headline leverage of 39% does not include SGD150m of perpetual securities.

Joshua Tan Maybank Kim Eng | Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-04-22

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