Keppel REIT - RHB Invest 2017-01-25: Lacking Catalysts

KEPPEL REIT K71U.SI

Keppel REIT - Lacking Catalysts

We maintain our NEUTRAL recommendation on Keppel REIT with an unchanged TP of SGD0.99 (5% downside).
While near-term challenges persist in the Singapore office sector, the impact on Keppel REIT is buffered by high portfolio occupancy and low lease expiries.
A potential uptick in office rental could come in early 2018 with supply bottoming out.

The stock currently offers a FY17F dividend yield of 6.1% and trades at a relatively low 0.8x P/BV.

Keppel REIT changed its methodology for computing rent reversions in 4Q16. While previous methodologies included other income such as lease pre-termination compensation, building advertising income and excluded one Singapore lease, the new methodology is calculated based on the change directly attributable to the new, renewal, forward renewal and review leases.
We view the new methodology as a cleaner and true reflection of underlying market dynamics. Based on its revised methodology, 9M16 rental reversions stood at -9% compared to +3% reported earlier and 4Q16 saw negative reversion of 6%.

Singapore office demand- supply dynamics remain negative in the near term, with 2.2m sqf of office space coming on stream in 2017, compared to 10-year average demand of 1.2m sqf. Thus, we expect office rents to see a further decline of 5-10% this year.
However, the impact on Keppel REIT is buffered, as only 3.9% of lease expiries are pending renewals in 2017, with average rent expiries at a low SGD9 psf per month, below current spot rents.

Occupancy at Bugis Junction Towers (BJT) dipped to 93.7% in 4Q16 as California Fitness vacated its premises. Management has backfilled two-thirds of the vacated space and is actively negotiating for the remaining space.
Overall portfolio occupancy slipped 0.3ppts QoQ, but remains high at 99.2%.

We have tweaked our FY17F DPU lower by 3%, factoring in lower contributions from BJT. Our TP is based on DDM methodology (CoE: 6.7%, TG: 2%).
Key re-rating catalysts are a pick-up in office sector demand and timely acquisitions/divestments.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-25

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.990 Same 0.990