Keppel REIT - CIMB Research 2017-10-17: 3Q17 Uneventful Quarter

Keppel REIT - CIMB Research 2017-10-17: 3Q17 Uneventful Quarter 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 | YEO Zhi Bin CIMB Research | 2017-10-17
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.20 Up 1.160