Keppel REIT - Maybank Kim Eng 2016-07-20: Maintain HOLD; TP raised for narrower yield target

KEPPEL REIT K71U.SI

Keppel REIT - Hesitant to chase this yield driven rally

2Q16 inline. Exposure to prevailing market weakness is relatively small as the amount of leases due to expire in the near term is low.
However, we remain cautious over its longer-term outlook as downside risks remain given the looming office oversupply.
Nonetheless, we raise our TP to SGD1.05 from SGD0.97 for a 50bps cut in target yield to 6.25%. This reflects yield compression from lower benchmark rates.

As the office sector continues to face significant headwinds, we are hesitant to chase this yield-driven rally.
Maintain HOLD.

2Q16 DPU of 1.61 SGD cts (-4.2% QoQ, -6.4 % YoY) is inline. The decline in distributions is due to absence of contribution from 77 King Street, which was divested earlier this year.
Overall occupancy remains high at 99.7% with signing rents down by a modest 1.9% QoQ to SGD10.10 psf. It managed to achieve positive rental reversion of 2% for 1H16.
The REIT distributed proceeds from divested properties for the fourth consecutive quarter. The non-core distribution of SGD5m accounted for 9.5% of total distributable income of SGD52.5m this quarter.

KREIT has a small amount of office leases due to expire in the near term with only 0.6%/9.5%/5.5%up for renewal in 2H16/2017/2018.
As these leases up for renewal have fairly low underlying rents of between mid- SGD8 to low-SGD9 psf, we believe it could still achieve positive rental reversions in the near term unless market conditions deteriorate significantly.
Nonetheless, we remain cautious over its longer-term outlook as downside risks remain given the looming office oversupply.

In SREIT Strategy: To flow or not to flow, we highlighted that REITs globally are a cheap asset class relative to bonds, and SREIT yields are the most attractive among developed markets. In an environment of heightened risks to growth, global bond yields have further compressed, supporting the case for further SREIT yield compression.
Accordingly, we tighten KREIT’s target yield by 50bps to 6.25%. This is broadly in line with the decline in 10Y government bond yield over the past six months.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-20

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.05 Up 0.97