KEPPEL REIT
K71U.SI
Keppel REIT - 3Q17 Uneventful Quarter
- Keppel REIT's 3Q/9MFY17 DPU of 1.4 Scts/4.27 Scts slightly below our expectations.
- Higher portfolio occupancy and slight negative reversion in 3Q.
- Pick up in office leasing sentiment to underpin FY18F renewals.
- Construction of 311 Spencer St has commenced, scheduled to complete in 4Q19.
- Maintain Hold, with a slightly higher Target Price of S$1.20.
3QFY17 results broadly in line
- KREIT reported 3Q/9MFY17 DPU of 1.4 Scts/4.27 Scts, accounting for 22%/66% of our full-year forecast, which is slightly below our expectation but in line with Blomberg consensus'.
- 3Q17 distribution income of S$47m was 10.4% lower yoy due to a decline in associate and JV contributions, higher borrowing cost and absence of divestment gain payout. This more than offset higher contributions from Bugis Junction Towers, 275 George St and 8 Exhibition St.
Slight negative drag from renewals
- Portfolio committed occupancy remained relatively stable at 99.6% in 3Q (vs. 99.8% in 2Q). For the 9M, the trust leased/renewed an attributable 250,200 sq ft (3Q: 76,600 sq ft) of space at a negative 3% reversion rate and maintained high retention rate of 91.8%.
- Portfolio weighted average lease expiry (WALE) stood at a long six years as at end- 3Q17.
Minimal remaining expiries for FY17F
- We expect KREIT’s earnings to remain stable qoq.
- Looking ahead, it has a minimal 0.5% of net lettable area (NLA) left to be renewed in FY17F and a 21.2% of renewals and rent reviews due in FY18F. Given the improved sentiment in the office leasing market and recent pick-up in office rents, we believe the gap between expiring and re-contracted rents are likely to continue narrowing.
Stable gearing
- Gearing remained largely unchanged, at 38.8% as at end-3Q17 with all-in interest cost at 2.58%. It is in the midst of refinancing the S$425m of loans due in FY18.
- Meanwhile construction works for the premium office tower at 311 Spencer St has commenced and are scheduled for completion in4Q19. The building has been pre-committed 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 leave our FY17-19 DPU estimates unchanged. However, our DDM-based TP rises slightly to S$1.20 with a slight tweak in our cost of equity assumption to 7.67% (vs. 7.76% previously) as we streamline our assumptions to match other S-REITs with Australian exposure.
- We keep our Hold rating.
- Key upside risk is a faster-than-expected recovery of the office leasing market in Singapore.
- Key downside risk is slower-than-expected economic growth in Singapore which would dampen the appetite for office space.
LOCK Mun Yee
CIMB Research
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YEO Zhi Bin
CIMB Research
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http://research.itradecimb.com/
2017-10-17
CIMB Research
SGX Stock
Analyst Report
1.20
Up
1.160
