Keppel REIT - CIMB Research 2018-04-18: Positive Rental Reversion In 1Q18

Keppel REIT - CIMB Research 2018-04-18: Positive Rental Reversion In 1Q18 KEPPEL REIT K71U.SI

Keppel REIT - Positive Rental Reversion In 1Q18

  • Keppel REIT's 1Q18 DPU of 1.42 Scts makes up c.25% of our FY18 forecast, in line with our expectation.
  • c.7% of portfolio net lettable area (NLA) renewed/reviewed in 1Q with positive rental reversions.
  • Further office sector recovery to drive forward earnings growth.
  • Bulk of loans on fixed-rate terms.
  • Upgrade to ADD with unchanged Target Price of S$1.34.

1QFY18 results highlights 

  • Keppel REIT (KREIT)’s 1Q18 results were within expectations, with gross revenue and distribution income fairly stable y-o-y at S$39.7m and S$48.2m, respectively. 1Q18 DPU of 1.42 Scts was 2.1% lower y-o-y due to a slight expansion in issued units base. 
  • During the quarter, Bugis Junction Tower and 8 Exhibition St in Australia delivered better results y-o-y and helped offset weaker earnings from 275 George St and other Singapore properties.
  • Portfolio occupancy remained fairly stable q-o-q at 99.4%.

Positive turnaround in re-contracted rents 

  • The trust renewed/leased an attributable 261,400 sq ft of NLA in 1Q18 or c.7% of its portfolio with a high retention rate of 93%. The Singapore leases (84% of total expiries) were re-contracted at an average S$10.05 psf or at a positive rental reversion of 3.6%.
  • Two-thirds of the committed leases were review leases while new leases made up another 23.3%. The bulk of demand came from the legal sector while in Australia, demand came from a government agency.

Further office rent recovery to drive forward earnings growth 

  • KREIT has a remainder 15% of leases due for renewal/review in FY18 and a further 11.9% in FY19, largely in Singapore. KREIT guided that as at end-FY17, the expiring rents of these leases range from S$8.50-12.00 psf. 
  • We maintain our expectation of a 15% y-o-y pick-up in spot rents for 2018F, and anticipate further positive rental reversions when these leases are renewed. This should continue to underpin its DPU growth going forward.

Bulk of debts on fixed rate borrowings 

  • Gearing stood at 38.6% as at end-1Q18, with weighted average debt maturity of 3.2 years. All-in interest rate was a little higher q-o-q at 2.75% post refinancing S$425m of loans in 1Q. 
  • Although its gearing is on the higher end of its comparable peers' range, we believe having 77% of its debt on fixed rates largely mitigates the near-term impact of rising interest rates. KREIT estimates that a 50bp uptick in funding cost could erode its DPU by 0.1 Scts or c.2.7%.

Upgrade to ADD 

  • We leave our FY18-20 DPU estimates unchanged and maintain our DDM-based Target Price of S$1.34 (cost of equity: 7.55%). 
  • KREIT’s share price has retraced 11% since late-Jan and currently offers 11% upside to our Target Price. Hence, we upgrade our call to ADD. 
  • With the sustained office market recovery, there could potentially be upside risks to our estimates which will further catalyse KREIT’s share price performance. 
  • Downside risk is a slowdown in economic activity, which could derail the appetite for office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-04-18
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