Keppel REIT - RHB Invest 2016-07-20: Not Out Of The Woods Yet

Keppel REIT - RHB Invest 2016-07-20: Not Out Of The Woods Yet KEPPEL REIT K71U.SI 

Keppel REIT - Not Out Of The Woods Yet

  • Keppel REIT 1H16’s results were within our expectations. The REIT has also successfully managed to renew the bulk of leases (13.4% of total NLA) expiring this year with a slight positive rental reversion of 2%. 
  • While we expect the office sector to continue facing headwinds till 2017, it is near full portfolio occupancy (99.7%) and investors’ appetite for yield instruments – amidst uncertain global markets – will continue to support share price. 
  • Maintain NEUTRAL, with a higher SGD0.97 TP (from SGD0.83, 11% downside).

Renewed bulk of leases expiring this year despite office glut. 

  • Keppel REIT has managed to successfully renew 13.4% of its portfolio net leasable area (NLA) expiring this year. It achieved a positive rental reversion of 2% on average in 1H16 (1Q16: 7%) and a high 99.7% retention ratio. Management has also managed to renew ~2% of leases expiring in 2017 and 2018.
  • Looking forward, we expect rental reversions to soften further, as we expect the office sector downtrend to prolong into 2017 with rent declining by another 5- 15%.On the positive side, Keppel REIT has managed to sign in 70,000 sq ft of new leases in 1H16, bringing overall portfolio occupancy to 99.7% (1Q16: 99.4%). Of these new leases signed, 20% were new to Singapore, 30% came from serviced offices and 50% of tenants upgraded to Grade-A office buildings.

Supply-demand dynamics remain unfavourable in the near term. 

  • Grade-A office space rentals fell 4% QoQ (16% YoY) in 2Q16 to SGD9.50 psf/month according to CBRE. Supply-demand dynamics are expected to remain unfavourable in the near term, as an average c.2m sq ft of office space is expected to be completed in the next three years vs a 10-year average demand of 1.2m sq ft. This will drive rent lower by 5-15%. 
  • However, the overall impact to Keppel REITs portfolio is mitigated, as the remaining leases due for renewal/review until 2018 are in the SGD8.50-9.50 psf range, ie still below the spot rental rate.

Remain NEUTRAL with a higher SGD0.97 TP. 

  • We make no changes to our earnings estimate. We arrive at our higher DDM TP by adjusting our TG assumptions to 2% (from 1%). This is as we see limited office supply locally after 2018. 
  • While near-term headwinds in the office sector are expected to continue to weigh on Keppel REIT’s share price, its high portfolio occupancy and investors’ hunt for yield stocks are expected to buffer some of the impact.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-20
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.97 Up 0.83