Keppel REIT - UOB Kay Hian 2018-01-24: 4QFY17 Results Below Expectation

REITs − Singapore - UOB Kay Hian 2018-01-24: 4QFY17 Results: KREIT (Below), 1QFY18: FCT (In-line), 3QFY18: MINT (In- Line) KEPPEL REIT K71U.SI

REITs − Singapore - 4QFY17 Results: KREIT (Below), 1QFY18: FCT (In-line), 3QFY18: MINT (In- Line)

  • Keppel REIT (KREIT), Frasers Centrepoint Trust (FCT), and Mapletree Industrial Trust (MINT) have reported their latest quarterly results. KREIT’s results came in below our and consensus expectations, due to lower-than-expected rent reversion on Singapore office properties. 
  • Maintain BUY with an unchanged target price of S$1.43 on KREIT. 
  • Maintain OVERWEIGHT on the sector.

Keppel REIT (KREIT SP/ Rating: BUY/ Target Price:S$1.43) 

Results below expectations; maintain BUY 

  • Results below expectations; maintain BUY with a target price of S$1.43, based on DDM (required return: 6.7% and terminal growth of 2.5%). 
  • KREIT’s 4Q17 DPU of 1.43 S cents was down 3.4% y-o-y, while FY17 distributable income was down 8.4% y-o-y due to the absence of income from 77 KingStreet in Sydney which was divested in Jan 16, lower-one off income received, lower rental support and the absence of other gains on distribution. 
  • The results were below expectations, with FY17 DPU at 95.6% of our full-year forecast, due to lower-than-expected rental contribution from Singapore properties.

Overall committed occupancy remained healthy at 99.7%. 

  • Committed occupancy of the Singapore office portfolio remained high at 99.6% (vs core CBD average occupancy of 93.8%). 
  • Committed occupancy of the Australian portfolio remained stable at 99.8% (vs Australia’s national CBD office market average occupancy of 89.2%).

Well-spread leases, with no more than 20% portfolio NLA expiring in a year. 

  • Some 22.5% of the portfolio NLA is due for renewals and review in 2018.

Continued pressure on rentals in 4Q17, though leasing momentum picking up.

  • Rent reversions came in at -4% for 2017 (compared to -3% in 9M17), amid the competitive supply side pressure in the office market. A total of 829,500 sf of spaces were committed in 2017 with signing rents at S$9.80 psf pm. 
  • Of the committed leases signed in 2017, 27% were new leases, 57% were renewal leases, and 16% were rent review leases. 
  • New leases were signed with tenants from diverse sectors with a majority from the TMT (38.2%), banking, insurance and financial services (14.6%) and real estate and property services sectors (13.5%). Tenant retention remained high at 95% for 2017.

Aggregate leverage remained stable at 38.7%. 

  • Weighted average term to maturity of borrowings was 5.5 years. Interest rate was stable at 2.62% with interest coverage ratio at 4.3x.

Positive office outlook in Singapore and Australia. 

  • Management noted that the general outlook for the Singapore office market remains positive, driven by improved economic prospects and a lower quantum of new supply in the mid-term, according to CBRE. 
  • Singapore's core CBD office occupancy improved 1.3 ppt q-o-q to 93.8% in 4Q17, driven by higher commitment levels at both new and existing office developments. Average Grade A rents increased 3.3% q-o-q to $9.40 psf pm over the same period due to stronger leasing activity, mainly from tenants in the co-working and technology sectors. 
  • In Australia, the national CBD office average occupancy was reported by JLL to have improved marginally by 0.1ppt to 89.2% as at end-Sep 17, with business conditions being at its best since early-2008 on an improved medium-term outlook on the back of Australian Bureau of Statistics reporting strong employment growth over 2017.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.430 Same 1.430
BUY Maintain BUY 2.430 Same 2.430
HOLD Maintain HOLD 1.880 Same 1.880