Keppel REIT (KREIT SP) - Maybank Kim Eng 2017-01-25: FY16 a slight miss on lack of capital distributions

KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - FY16 a slight miss on lack of capital distributions

FY16 was a marginal miss due to lower-than-expected capital distributions.
We cut FY17-18 DPU by 2% each to reflect slightly higher vacancy and lower rents, as evidenced by the negative rental reversions reported. This led to a slight cut in our TP to SGD1.18 (from SGD1.21), based on a target yield of 5.25%.

Nonetheless, reiterate BUY as elevated prices for office assets in the physical market will continue to support the sector’s valuation.
Our target yield is close to its historical low to reflect strong capital value support and incorporates our relative preference amongst office REITs.
Risks to our view include sharper-than-expected decline in office rents and overpaying for acquisitions.

FY16 DPU was a marginal miss due to lower-than-expected capital distributions. No capital distributions were made in 4Q16 (4Q15: SGD5m).
Operating trends were broadly in line with the exception of sustained vacancy at Bugis Junction Tower (BJT).
KREIT has a total of SGD48m of other gains that has not been distributed, which can support DPU downside amid the market weakness.
With the exception of BJT, where its property value was cut by SGD10m to SGD540m, valuations of its Singapore assets remain unchanged. Higher valuations of its Australia assets reflect a 40-50bps cut in cap rate.

KREIT recently announced a downwards revision to its rental reversions for 1H16 and 9M16. For FY16, the group reported negative rental reversion of 9% for all leases, including forward renewals, signed in the year.
The small amount of leases due for renewal near term (FY17/18: 3.9%/7.1%) suggests a low risk of a sharp pick up in vacancy. However, we expect income weakness as negative rental reversions reported for FY16 includes forward renewals.

KREIT offers the best exposure to Singapore’s prime office market with assets in this sector accounting for 89% of its assets.
The stock’s implied capital value of SGD2,200 psf and 4.2% cap rate remains attractive when compared to the replacement cost of a new office building (SGD2,800 psf) and the recent transaction of Asia Square Tower 1 (SGD2,704 psf).

Sharper-than-expected declines in office rents or occupancy.
Overpaying for acquisitions.
Higher financial leverage implies bigger exposure to interest-rate spikes than peers.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-25

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.18 Down 1.210