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

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.

New methodology reveals negative FY16 rent reversions of 9%. 

  • 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%.

Headwinds persist in 2017 but impact buffered. 

  • 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.

Slight dip in portfolio occupancy. 

  • 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%.

Maintain NEUTRAL with a TP of SGD0.99. 

  • 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