Keppel REIT - CIMB Research 2017-07-18: Decelerating Rental Reversion Drag

Keppel REIT - CIMB Research 2017-07-18: Decelerating Rental Reversion Drag KEPPEL REIT K71U.SI

Keppel REIT - Decelerating Rental Reversion Drag

  • Keppel REIT's 1HFY17 results slightly below at 45% of FY17 forecast, but in line with consensus.
  • 2Q drag in distribution income was partly offset by an absence of negative reversions.
  • Minimal lease expiries in 2H but high base rents may drag on rental recovery.
  • Recently acquired Spenser St development to drive mid-term growth.
  • Maintain Hold with an unchanged Target Price of S$1.16.

2QFY17 results slightly below our estimates 

  • KREIT’s 2QFY17 results were slightly below our expectations but in line with consensus.
  • Topline and NPI dipped 1.7% yoy to S$39.8m/S$31.9m while distribution income fell a greater 9.7% yoy to S$47.4m, owing to a lack of distribution of divestment gains during the quarter. 
  • DPU fell 11.8% yoy to 1.42 Scts. 
  • For 1HFY17, DPU of 2.87 Scts was 12.8% lower yoy and made up c.45% of our FY17 forecast.

No drag from negative reversions in 2Q 

  • The drag in distribution income was due to lower contributions from Bugis Junction Tower (BJT) and One Raffles Quay (ORQ). The trust renewed an estimated attributable 105,900 sqft of NLA in 2QFY17 at similar levels vs. the previous period. 
  • With a retention rate of 85%, portfolio committed occupancy remained at a high 99.8% (99.4% in 1Q).

Minimal expiries in 2H17 but high base rents may drag on recovery 

  • Looking ahead, we expect KREIT’s earnings to remain fairly stable on a qoq basis. The trust has a remaining 2% of leases to be renewed in FY17 and another 21.2% in FY18.
  • Management indicated that expiring rents range between mid-S$8psf to S$13psf in FY17 and S$9.50-12.50psf in FY18. While we expect the leasing market to start to bottom out towards the latter part of this year, we believe there could be some marginal negative rental reversions due to a high base effect.

Recently acquired Spenser St development for mid-term growth 

  • Gearing remained largely unchanged qoq at 38.5% while all-in interest cost ticked up marginally to 2.59% in 2Q. 
  • KREIT has a gross cash position of c.S$279m as at end- 2Q17. Part of this can be utilised to progressively fund its 50% share of the recently acquired 311 Spenser St, valued at A$347.8m (S$362.4m). When completed by 4Q19, the property will be leased to the Assistant Treasurer for the State of Victoria on a 30-year net lease, with an average 6.4% annual yield for the first 15 years.

Maintain Hold 

  • We tweak our FY17-19 DPU down by a marginal 0.3-1% to factor in the impact of additional units issued for its dividend reinvestment plan. However, our DDM-based target price remains unchanged at S$1.16. 
  • KREIT offers a total return of c.5.5%, hence we maintain our Hold rating. 
  • Upside risk could come from a faster-than-expected recovery of the office leasing market while downside risk could emerge from a protracted weak economy which would dampen the appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-18
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.16 Same 1.16