Keppel REIT - CIMB Research 2016-10-18: Limited near-term upside

Keppel REIT - CIMB Research 2016-10-18: Limited near-term upside KEPPEL REIT K71U.SI

Keppel REIT - Limited near-term upside

  • 3QFY16/9MFY16 DPU within expectations, making up 24%/73% of our FY16F forecast.
  • Portfolio occupancy remains high at 100%, achieved 3% positive rental reversion.
  • Tenant retention is key, 9-21% of leases to be renewed/reviewed in FY17-18F.
  • Strong balance sheet, no loan refinancing till 2H18.
  • Downgrade to Hold from Add on valuation, TP unchanged at S$1.14.

3QFY16 results in line 

  • KREIT reported a 3QFY16 topline of S$39.5m (US$28.6m), down 6.3% yoy due to an income vacuum post the sale of 77 King St and lower contributions from Bugis Junction Towers (BJT) due to the closure of California Fitness
  • This was partly compensated by higher associate and JV contributions from Singapore (ORQ and MBFC) and Australia, lower borrowing costs, as well as a S$3m divestment gain payout. Distribution income was 3.6% lower yoy at S$52.5m, translating to a DPU of 1.6 Scts.

Keeping portfolio occupancy high 

  • The trust renewed 635k sqf of NLA in 3Q and achieved portfolio occupancy of 100%.
  • Demand came largely from relocation and expansion activities by existing tenants and a small percentage of new-to-market names, from trade sectors such as financial services, legal, TMT, government agencies, and real estate. 
  • It achieved positive rental reversion of 3% for 9M16 (vs 2% in 1H16) with average signing rents of S$9.85psf.

Maintaining tenant retention strategy 

  • Looking ahead, KREIT has completed re-contracting leases due in FY16 and has a remainder of 9.2% of leases to be renewed/reviewed in FY17F and a further 20.8% in FY18F. 
  • Expiring rents are in the low-S$9psf range (in the first rental renewal cycle) and we think KREIT could see neutral-to-slightly-negative reversions, mitigated by distribution of divestment gains. 
  • Current spot rents in the CBD average S$9.30psf and is expected to trend down due to the large supply and slow economic growth environment.

No loan refinancing till 2HFY18 

  • KREIT has completed its financing requirements for FY16-17 and has no loans due in 2H18. 
  • Average interest cost dipped slightly to 2.53%, and 74% of its debt is in fixed rate loans. Balance sheet remains healthy, with gearing of 39%.

Downgrade on valuation 

  • We leave our FY16-18F DPU estimates unchanged and maintain our DDM-based target price at S$1.14. 
  • KREIT’s share price has done well and in view of the limited near-term upside, we lower our recommendation to Hold on valuation. 
  • The stock currently offers an FY16F DPU yield of 6%. 
  • Upside risk is if the office rents recover faster than expected.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2016-10-18
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.140 Same 1.140