Keppel REIT - CIMB Research 2018-01-23: Less Drag From Negative Rental Reversion

KEPPEL REIT K71U.SI

Keppel REIT - Less Drag From Negative Rental Reversion

Keppel REIT's 4Q/FY17 DPU of 1.43 Scts/5.7 Scts was slightly below our expectation.
Less drag from negative rental reversion; maintained high portfolio occupancy.
Improved office leasing market should be supportive of FY18 renewals.
Maintain HOLD with a slightly higher Target Price of S$1.34.

Keppel REIT (KREIT) reported 4Q/FY17 DPU of 1.43 Scts/5.70 Scts, making up 22%/87% of our full-year forecast, which is slightly below our expectation but in line with market consensus.
FY17 distribution income of S$190.7m was 8% lower y-o-y due to loss of income from the sale of an Australian office building in FY16 and absence of divestment gains. This was partly offset by higher contributions from Ocean Financial Center and 2 Australian properties.
The trust booked in a revaluation gain of S$51.7m, largely from its Australian portfolio.

Keppel REIT's portfolio committed occupancy stands at 99.7% at end-4Q17, stable q-o-q. The trust renewed/leased an attributable 377,700 sqft of space in FY17 (4Q: 127,500 sqft) at a negative 4% rental reversion rate (vs. -9% in FY16) even as it maintained a high retention rate of 95%.
Signing rents in Singapore averaged S$9.80psf vs. S$9.60psf in FY16. 27% of its committed leases signed in FY17 were new leases, with demand coming from TMT, banking insurance, financial services and real estate and property services sectors.

Looking ahead, Keppel REIT has 22.5% of portfolio NLA due to be renewed/reviewed in FY18 and a further 12% in FY19. The bulk of the FY18 expiries are from its Singapore portfolio and due to be re-contracted in the latter part of 2018. Expiring rents range between S$8.50 and S$12.00psf.
Given the pick-up in office rents, amid broader-based economic growth, we believe the gap between expiring rents and renewal rents is likely to narrow or turn positive. This should underpin Keppel REIT’s DPU growth.

Keppel REIT's gearing held steady at 38.7% as at end-FY17, with a slightly higher all-in interest cost of 2.62%. An estimated 77% of the trust’s borrowings are on fixed rates. The trust has received commitments to refinance S$425m due in FY18, thus extending its debt maturity to 3.4 years.
Construction of the premium office tower at 311 Spencer St is under way, with piling works completed at end-2017. The building is on track to be completed by 4Q19.

We tweak down our FY18-19 DPU estimates and introduce our FY20 projections. Our DDM-based Target Price is raised to S$1.34 as we roll forward our assumptions and adjust our cost of equity marginally to 7.6% (vs. 7.7% previously).
We keep our HOLD rating on the back of an expected total return of 6%.
Upside risk is a faster-than-expected office leasing market recovery while downside risk is a slowdown in economic activity in Singapore, which would dampen the appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-23

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.34 Up 1.200