Keppel REIT (KREIT SP) - DBS Research 2018-04-19: Green Shoots

Keppel REIT (KREIT SP) - DBS Vickers 2018-04-19: Green Shoots KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - Green Shoots

  • Keppel REIT's 1Q18 DPU of 1.42 Scts (-2% y-o-y) in line with expectations.
  • Decline in DPU due to impact from fall in AUD, reduced income support and lower occupancy at 275 George Street.
  • Brighter outlook with positive rental reversions achieved in 1Q18 and rapidly rising spot office rents.
  • Maintain BUY, Target Price of S$1.41.

What’s New 

1Q18 DPU of 1.42 Scts 

  • Keppel REIT (KREIT) delivered 1Q18 DPU of 1.42 Scts which was down 2% y-o-y. However, this is in line with our expectations and represents c.25% of our full-year forecast.
  • The fall in DPU was largely due to the 1% dip in NPI as KREIT was impacted by a y-o-y decline in AUD vs SGD, as well as lower earnings contribution from 275 George Street (NPI down 31% y-o-y) which saw occupancy fall to 93.4% from 99.7% at end4Q17.
  • A major tenant at 275 George Street which extended its lease returned some space. However, we understand that KREIT has since backfilled more than half of the vacated space.
  • Furthermore, KREIT’s 1Q18 results were impacted by the absence of income support from Ocean Financial Centre (OFC) and decline in rental support from MBFC (S$2.2m versus S$2.6m). Income received from Marina Bay Financial Centre (MBFC) and One Raffles Quay (ORQ) were also lower by 13% and 26% y-o-y respectively, owing mainly to the absence of one-off income received in 1Q17.
  • These negative headwinds were partially offset by higher NPI at Bugis Junction (+10% y-o-y, occupancy rose to 99.1% versus 95.9% in 1Q17) and 8 Exhibition Street (+18% y-o-y, boosted by recoveries). Contributions from 8 Chifley Square and David Malcolm Justice Centre were relatively flat in AUD terms.
  • Overall portfolio occupancy remained healthy at 99.4%. Majority of KREIT’s properties have committed occupancy levels above 99% with the exception of 275 George Street.

Progress made on the leasing front with positive rental reversions in Singapore. 

  • Over 1Q18, KREIT successfully renewed or re-let c.674,100 sqft of space (attributable of c.261,400 sqft). Consequently, for the remainder of FY18, only 6.2% and 8.8% of leases are up for renewal and subject to rent reviews respectively, down from 8.3% and 14.2% at end-4Q17. No significant progress was made for FY19, with 10.3% and 1.6% of leases due to expire and subject to rent reviews respectively.
  • KREIT was able to achieve higher average signing rents for Singapore office leases in 1Q18 of c.S$10.05 psf/mth compared to S$9.80 psf/mth for FY17. We also understand KREIT was able to achieve a 3.6% positive rental reversion in 1Q18. This compares to the -9% and -4% recorded for the overall portfolio for FY16 and FY17 respectively. 
  • In terms of leasing activity, KREIT saw new demand coming mainly from expanding legal firms while in Australia, a government agency took up space at 275 George Street.
  • Overall portfolio WALE was steady at c.5.3 years (5.5 years at 31 December 2017).

Stable capital structure 

  • Aggregate leverage was stable at 38.7%, with allin interest rate ticking up slightly to 2.75% from 2.62%. The proportion of fixed rate debt was steady at 77%.
  • In addition, KREIT has no refinancing requirements until 2019 when it is set to refinance S$762m worth of borrowings (22% of total debt outstanding).
  • As at 31 March 2018, net asset value per unit stood at S$1.42, marginally down from S$1.41 at 31 December 2017.

Rapidly rising spot office rents present upside risk 

  • According to CBRE, CBD Grade A office rents increased 3.2% q-o-q to S$9.70 psf/mth due to stronger leasing activity from the co-working and technology sectors.
  • If the sequential improvement in rents continues over the coming quarters, there is risk that spot CBD Grade A rents would exceed our initial estimate of S$10 psf/mth by end-FY18. This presents upside risk to our DPU estimates and places KREIT in a strong negotiating position for its upcoming renewals and rent reviews. 
  • We understand the rents for the majority of leases in FY18 range from S$8.50-12.00 psf/mth.

Maintain BUY, Target Price of S$1.41 

  • With 1Q18 results in line with expectations and KREIT trading below book value, we maintain our BUY call and Target Price of S$1.41.
  • We believe the strong leasing momentum and rapidly rising spot rents should act as re-rating catalysts for KREIT going forward. 
  • Furthermore, should KREIT activate a share buyback after obtaining shareholder approval at its upcoming AGM, this should also send a positive signal to investors and further boost KREIT’s share price.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-04-19
SGX Stock Analyst Report BUY Maintain BUY 1.410 Same 1.410