Keppel REIT (KREIT SP) - Maybank Kim Eng 2018-01-24: Better Value In Developer Landlords

Keppel REIT(KREIT SP) - Maybank Kim Eng 2018-01-24: Better Value In Developer Landlords KEPPEL REIT K71U.SI

Keppel REIT(KREIT SP) - Better Value In Developer Landlords


Maintain HOLD; Positives priced-in 

  • Keppel REIT (KREIT)'s FY17 DPU was slightly below ours and consensus estimates. While Keppel REIT continues to report negative rental reversions, the magnitude of the contraction has lessened. Also, asset valuations were largely unchanged.
  • While the narrow trading yield of KREIT is justified by a turn in the office cycle, we believe valuations are rich (4.3% yield, 0.94x P/BV) relative to historical values and could cap share price upside in the near-term.
  • Maintain HOLD and Target Price of SGD1.19 based on a target yield of 5.25%. For exposure to Singapore’s recovering office market, we see better value in developer landlords with large prime office exposure (UOL and GuocoLand).



No surprise; Smaller negative reversion a positive 

  • FY17 DPU of 5.7cts was 95% of our estimate. In 4Q17, Net Property Income for Ocean Financial Centre was lifted by one-off pre-termination income of SGD4.2m. However, no surprises in its underlying property metrics. 
  • Portfolio occupancy was healthy at 99.7% with average signing rents at SGD9.80 psf for the year. Rent reversion for FY17 improved to - 4% (2016: -9%) reflecting the marginal uptick in spot rents over the past year. 
  • KREIT has 8.3% of leases up for renewal and another 14.2% due for rent review in FY18. With expiring rents at SGD8.50-SGD12 psf, we expect negative reversion to persist for another year.


Property values largely unchanged 

  • Contrary to our call for higher asset values, KREIT’s valuers have kept the valuation of its Singapore assets largely unchanged. This reflects an unchanged cap rate of 3.75% used for its offices despite narrow yields at various office transactions and more aggressive valuations used by its peers. 
  • We view this as a positive for unitholders as DPUs will not be weighed down by a large increase in asset management fees (based on 0.5% of asset value +3.0% of NPI).


Positive data points in Singapore’s office market 

  • Preliminary data from CBRE showed that Grade A rents trended higher in 4Q17 to SGD9.40 psf (+3.3% q-o-q). 
  • While market sentiment has improved significantly over the past year, we caution that rents may only rise moderately as 300k+ sf of secondary office space will be available annually in 2018/9E (CBRE estimates)as tenants move into new offices.



Swing Factors


Upside

  • Appreciation in the capital value of its properties.
  • Divestment of fringe assets to reduce leverage.
  • Earlier-than-expected rebound in office rents.

Downside

  • Sharper-than-expected decline in office rents or occupancies.
  • Overpaying for acquisitions.
  • Higher financial leverage implies bigger exposure to interest-rate spikes than peers.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-24
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.190 Same 1.190



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