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.

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.

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.

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.

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%.

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

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