Keppel REIT - CIMB Research 2016-07-20: Focus on tenant retention

Keppel REIT - CIMB Research 2016-07-20: Focus on tenant retention KEPPEL REIT K71U.SI 

Keppel REIT - Focus on tenant retention

  • 2Q16 DPU slightly below estimates, drag from sale of Australian property.
  • Focus on tenant retention with portfolio occupancy remaining at 99.7%.
  • Partly de-risking portfolio through forward renewals, neutral to slightly negative rental reversions to be mitigated by distribution of asset divestment gains.
  • Healthy balance sheet with no refinancing need in 2H16-FY17.
  • Maintain Add with a slightly higher target price of S$1.14.

Drag from income vacuum post asset sale

  • KREIT saw 5.6% and 6.5% yoy declines in 2Q16 revenue and NPI to S$40.6m and S$32.5m, respectively, dragged by the income vacuum following the sale of the 77 Kings St property. However, distribution income fell by a smaller 4.2% to S$52.5m, thanks to a payout of S$5m from divestment gains. 
  • 2Q/1H DPU came in at 1.61 Scts/ 3.29 Scts, slightly below our estimates. 
  • The trust also recorded a S$62m revaluation surplus from its Singapore portfolio.

Tenant retention remains key

  • KREIT renewed 900ksf of NLA in 1H (2Q 547ksf), of which 8% were new leases. These tenants come from the banking and financial services to real estate and property services sectors. There was also demand from tenants upgrading to better locations and buildings. 
  • While the 2% positive reversion quantum in 1H was slower than in the past 2 quarters, KREIT’s tenant retention strategy has been successful and portfolio occupancy stayed at a high 99.7%. Signing rents averaged S$10.10psf (vs. S$10.30psf in 1Q).

De-risking portfolio through forward renewals

  • KREIT has partly de-risked its portfolio via forward renewals and has 0.6% of leases expiring in 2H16 with 13.5%/21% of leases to be re-contracted in FY17/18. 
  • Management guides that the expiring rents average between mid-S$8psf to low S$9psf vs. current spot rent of S$9.50psf. The bulk of new office supply is set to come onstream in end- 2016 and 2017 and drag on rental outlook. Hence, we think KREIT could see neutral to slightly negative reversions, mitigated by the distribution of asset divestment gains.

Refinancing completed for FY16-17

  • KREIT has completed its financing requirements for FY16 and FY17 and achieved a slightly lower average cost of debt of 2.55% and 75% of its debt in fixed rate loans. Its balance sheet remains healthy, with a gearing of 39%. It has also hedged most of its A$ distribution income till 1H17.

Maintain Add

  • We tweak our FY16-18 DPU estimates lower by 2-7% to factor in the latest rental updates and trends, as well as for the additional units issued under its distribution reinvestment plan. 
  • Our DDM-based target price is raised to S$1.14 as we adjust our cost of equity to 7.6% (vs. 8.2% previously). 
  • Maintain Add with a potential total return of 12%. 
  • Risk to our call is if the office rental market corrects more than expected.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-19
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.14 Up 1.08