Keppel REIT - CIMB Research 2017-04-20: Business As Usual

Keppel REIT - CIMB Research 2017-04-20: Business as usual KEPPEL REIT K71U.SI

Keppel REIT - Business as usual

  • 1Q17 DPU of 1.45 Sts slightly below expectation, accounting for 22.5% of our FY17 forecast.
  • Renewed an attributable 67,700sf at slight negative rental reversion.
  • Tenant retention is key; a further 4.5% of leases to be renewed/reviewed in 2017, another 22.3% in 2018.
  • Maintain Hold, with a slightly higher target price of S$1.09.

1Q17 results highlights 

  • KREIT reported 3.2%/4.6% decline in 1Q17 topline/NPI on the back of income vacuum from the sale of 77 King St in Australia and lower contribution from Bugis Junction Tower (BJ). 
  • Higher operating expenses, e.g. marketing and repair and maintenance, resulted in a 1.2% pt decline in NPI margin to 78.8%. This was partly offset by increased associate and JV contributions. 
  • 1Q17 DPU of 1.45 Scts was 13.7% lower yoy (without capital distribution from divestment gains) and accounted for c.22.5% of our FY17 forecast.

Maintaining tenant retention strategy 

  • KREIT renewed/leased an attributable 67,700sf of NLA in 1Q17 and at a 1% negative rental reversion as competition from newly completed buildings continue to be a drag on rental rates. 
  • With an 87% tenant retention rate, portfolio occupancy remained high at 99.4%.

Little remaining lease renewals in FY17 

  • KREIT has a remaining 4.5% of its leases up for renewal/review in FY17 and a further 22.3% in FY18. Expiring rents range from S$7.70-13.80psf in FY17 and S$8.10- 15.00psf in FY18. 
  • While we think there could still be some rental pressure in 1H, we expect the leasing market to bottom out towards the latter part of this year as pre-commitment rates for newly completed properties have increased. 
  • We expect KREIT to continue adopting a tenant-centric approach to maintain a well occupied portfolio.

Stable leverage ratio 

  • Gearing remained stable at 38.4% and all-in interest cost ticked up marginally qoq to 2.57% in 1Q17. 
  • With no refinancing needs till FY18 and 75% of its borrowings on fixed rate basis, we expect KREIT's balance sheet to remain robust.

Maintain Hold 

  • We leave our FY17-19 DPU estimates unchanged but raise our DDM-based target price to S$1.09 in tandem with our sector-wide adjustment of Singapore discount rate assumption. Hence, we maintain our Hold rating. 
  • A potential re-rating catalyst would be a quicker-than-expected recovery in the office sector while a protracted weak economy which would dampen appetite for office space is a key downside risk to our call

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-04-20
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.090 Up 1.030