Keppel REIT (KREIT SP) - UOB Kay Hian 2017-10-19: 3Q17 On The Road To Recovery

Keppel REIT (KREIT SP) - UOB Kay Hian 2017-10-19: 3Q17 On The Road To Recovery KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - 3Q17 On The Road To Recovery

  • Keppel REIT (KREIT)'s 3Q17 results were slightly below expectations due to a lower-than-expected contribution from Singapore office properties. 
  • KREIT continues to achieve high overall occupancy (99.6%) and tenant retention (91.8%). The recovery in office rents on the back of a pick-up in leasing momentum and tight supply forward will mitigate the negative rent reversions (9M17: -3%). 
  • Maintain BUY and target price of S$1.30.



RESULTS


Results slightly below expectations. 

  • Keppel REIT (KREIT) reported 3Q17 DPU of 1.40 S cents/share (-12.5% yoy, -1.4% qoq), bringing 9M17 DPU to 4.27 S cents, down 12.7% yoy. 
  • 9M17 property income dipped 0.9% yoy to S$120.1m and NPI was down 2.1% yoy to S$95m mainly due to the absence of income contribution from 77 King Street (divested in Jan 16) and lower property income from Bugis Junction Towers. 
  • The drop in 3Q17 DPU was partially attributed to the additional dilutive effect of its distribution reinvestment plan (with 7.4m units issued in 3Q17) and the absence of gains from asset sales. 
  • Results were slightly below expectations, with 9M17 DPU representing 71.1% of our full-year estimate.


STOCK IMPACT

  • Aggressive forward renewals to mitigate leasing risks, leaving a mere 0.5% and 6.7% by NLA remaining in 2017 and 2018 respectively. Negotiations for some leases due for renewal (6.7%) and review (14.5%) in 2018 are already underway. 
  • KREIT’s key tenants included a diverse mix from the banking, insurance and financial services (44.0%), TMT (10.2%), Legal (9.8%) and energy, natural resources, shipping & marine (9%) as at 3Q17. 
  • Overall committed occupancy remained high at 99.6%. The committed occupancy of Singapore office stood at 99.6% (vs core CBD’s average of 92.5%), alongside committed occupancy of the Australian portfolio at 99.8% (vs Australia’s CBD average of 89.1%).

Continued pressure on rentals in 3Q17. 

  • Amid competitive supply-side pressure in the office market, rent reversions were coming at -3% for 9M17 (vs 0% in 1H17).
  • Gearing remained stable at 38.8% (2Q17: 38.5%). The weighted average term to maturity stood at three years, while interest rate remained stable at 2.58% with interest coverage ratio at 4.4x.

Recovery in Grade-A CBD core office rentals. 

  • Grade-A CBD core rents have increased for the first time in 10 quarters with rentals rising 1.7% qoq to S$9.10 psf pm, according to CBRE. Jones Lang Lasalle also reported overall CBD rents growing for the second consecutive quarter and at a faster pace than in 2Q17, due mainly to the high occupancy in quality buildings, especially those in the Marina Bay.

Near-term positive outlook. 

  • Landlords of higher-quality buildings are expecting higher rents on the back of stronger economic fundamentals and demand-supply dynamics.
  • The continued flight to quality has led to Marina One and UIC Building reaching pre-commitments of about 70%. The new demand is coming mostly from the co-working and technology sectors (such as Agoda, Amadeus and Netflix), amid tightening availability of quality space with new supply in core CBD remaining at a meagre 0.81msf annually beyond 2017.


EARNINGS REVISION 

  • We tweak our 2017F DPU marginally by -1%, factoring in lower-than-expected rents from Singapore office properties.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$1.30, based on DDM (required rate of return: 6.7%, terminal growth: 2%).


SHARE PRICE CATALYST

  • Higher office rentals.
  • Positive newsflow on leasing activity, employment and economic growth.
  • Slower rise in interest rates.




Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-19
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.300 Same 1.300



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