Keppel REIT - CIMB Research 2017-01-24: Subdued near-term outlook

Keppel REIT - CIMB Research 2017-01-24: Subdued near-term outlook KEPPEL REIT K71U.SI

Keppel REIT - Subdued near-term outlook

  • FY16 DPU of 6.37 Scts was slightly below our expectation at 94% of our forecast.
  • Dragged by income vacuum for asset sale, lower Bugis Junction Tower (BJT) occupancy and absence of capital distribution in 4Q16.
  • Maintaining tenant retention strategy to keep portfolio occupancy high, looming new completions likely to drag on rental outlook in 1H17.
  • Balance sheet remains stable with gearing at 38.5%.
  • Retain Hold rating with a slightly higher target price of S$1.03.

4QFY16 results highlights 

  • KREIT reported a 12% decline in 4Q16 DPU to 1.48 Scts while full-year FY16 DPU showed a lesser contraction of 6.3% to 6.37 Scts. 
  • 4Q performance was impacted by revenue vacuum from the sale of 77 King St, lower occupancy at Bugis Junction Tower (BJT) and absence of capital distribution from asset divestment gains. 
  • FY16 DPU was slightly below our expectation, making up c.94% of our forecast.

Continue to adopt tenant retention strategy 

  • The trust renewed 621,000sf of space in 4Q (2.2m sf in FY16) and kept portfolio committed occupancy high at 99.2% with a retention rate of 95%. However, this was achieved on the back of a 9% decline in reversion rents amid fierce competition from newly completed buildings as the oversupplied market conditions continued to drag on rents and take-up levels. 
  • It achieved an average signing rent of S$9.60psf for its Singapore office leases in FY16.

Large new supply to continue pressuring rents in 1H17 

  • Going forward, KREIT has a remaining 5.6% of leases due to be renewed/reviewed in FY17 and a further 22.5% in FY18. Expiring rents are around the low S$9psf range. 
  • We think rents are likely to continue to come under pressure in 1H17 but sentiment could improve as we move past the wall of incoming new supply in the latter part of 2017. Hence, we think KREIT could continue to experience slightly negative rental reversion this year.

Stable balance sheet 

  • Although gearing of 38.5% is on the higher end vs. comparable peers, KREIT’s balance sheet metrics remain stable with no refinancing needs until FY18. 
  • About 75% of its borrowings are on a fixed rate basis with an all-in interest cost of 2.51%.

Maintain Hold 

  • We tweak down our FY17-18 DPU estimates to adjust for the latest results and raise our DDM-based target price slightly to S$1.03 as we roll forward our projections. 
  • In view of the limited near-term upside, we maintain our Hold rating. 
  • The stock currently offers a dividend yield of c.6.2%. 
  • A potential catalyst would be a quick recovery in the office sector while risks could be a protracted weak economy that would dampen the appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-01-24
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.030 Up 1.020