Keppel REIT - RHB Invest 2017-07-19: Fully Valued

Keppel REIT - RHB Invest 2017-07-19: Fully Valued KEPPEL REIT K71U.SI

Keppel REIT - Fully Valued

  • K-REIT’s 2Q results were slightly below our expectations due to a lower contribution from BJT and the absence of an one-off income. 
  • Rent reversions turned slightly positive for the quarter, reflecting a potential market bottom. However, positive impact from potential rent rebound on K-REIT’s portfolio is minimal, due to a high occupancy and minimal lease expiries. 
  • With gearing likely to cross 40% levels post recent acquisitions, we believe there is a possibility of an equity fund raising. 
  • The stock currently offers modest FY17-18F yields of 5.0%/5.2%. Maintain NEUTRAL.

Slight positive rent reversions in 2Q17. 

  • Keppel REIT (K-REIT) signed 23 leases (~288,000 sq ft) in 2Q17 at an estimated rent reversion of 0.3%. 
  • The positive rent reversion, after a challenging last year, indicates a potential bottom in SG Grade-A office rents. 
  • Leasing activity also picked up, resulting in a 0.4ppt (QoQ) increase in portfolio occupancy to 99.8%, with higher occupancy in Bugis Junction Towers (BJT) (97.6%) and Ocean Financial Centre (100%).

Minimal positive impact from potential rebound in SG office rents. 

  • K-REIT has about 2%/6.6% of leases expiring in 2H17F-FY18F. In addition, about 14.6% of its total portfolio is subject to rent review in FY18F. 
  • Management indicated that expiring rents for FY18F are in the range of c.SGD9.50-12.50psf, which are still well above the CBRE average Grade A rents (2Q17) of SGD8.95 psf. 
  • While we expect the SG office Grade-A rents to bottom out this year and rebound by 3-5% in 2018, the potential impact on K-REIT’s portfolio is minimal due to its high portfolio occupancy and minimal lease expiries.

Hunting for yields in the Australian market. 

  • With recent cap rate compression limiting acquisition opportunities locally, K-REIT turned its focus to the Australian market. 
  • On June 2017 it announced the acquisition of a 50% stake in a premium office tower to be developed at 311 Spencer Street, Melbourne, Australia. The aggregate consideration of AUD347.8m (c.SGD362.4m) would be paid progressively over the completion period. Upon completion, the building would be fully leased by Assistant Treasure (State of Victoria) on a 30-year net lease. The property comes with an average rental yield of 6.4% p.a. over the first 15 years.

Potential equity fund raising on the cards? 

  • K-REIT plans to fund the above acquisition via a combination of debt and divestment proceeds from 77 King Street. 
  • With K-REIT’s current gearing at 38.5%, a 100% debt funding would increase gearing above the 40% levels, closer to K-REIT management’s guided comfort-level limit of 41-42%. We believe management would consider all funding options, including a potential equity fund raising, to lower the gearing.

NEUTRAL with a revised Target Price of SGD1.05 (from SGD0.99). 

  • We lower by 3-5% our FY17F-19F DPU by adjusting our average rental assumptions for SG office properties. Additionally, we have tweaked our DDM model by lowering our COE assumptions to 6.5% (previous 6.7%) and introducing DPU forecasts for FY20F-21F. 
  • Key re-rating catalysts are better than expected pick-up in office sector demand and potential office property divestments at good price. 
  • A key risk is the Singaporean economy falling into recession, reducing office demand.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-19
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.05 Up 0.990