Keppel REIT (KREIT SP) - Maybank Kim Eng 2018-04-19: Positives Priced-In

Keppel REIT (KREIT SP) - Maybank Kim Eng 2018-04-19: Positives Priced-In KEPPEL REIT K71U.SI

Keppel REIT (KREIT SP) - Positives Priced-In


5% yield looks fair; Maintain HOLD 

  • Keppel REIT's 1Q18 core distributable income to unitholders was inline ours and consensus estimates, and flat despite high-base effects from one-off pre-termination fees received in the comparable prior quarters. 
  • The first positive reversion in a year has signalled a turning point in the office market, in our view. Nonetheless, we flag vacancy risk at Ocean Financial Centre (OFC) in the year ahead. 
  • While Keppel REIT is a good proxy for a rebound in Singapore’s office market, its narrow trading yield of 5% has already priced in a favourable outlook. Maintain HOLD and SGD1.19 Target Price, based on a target yield of 5.25%. 
  • Prefer developer landlords, UOL Group and GuocoLand, for office exposure.



Positive reversion a good sign 

  • Core distributable income was in line at 24% of our full-year estimates.
  • Considering high-base effects from one-off pre-termination fees in the comparable quarters, we find the flat distributions to unitholders decent. There was also no capital gains distribution in the quarter.
  • Committed occupancy in Singapore remains strong at 99.8%. However, lower occupancy of 93.4% at 275 George Street was a small drag on its performance in Australia. 
  • Management guides for a positive rental reversion of 3.6% for leases signed across its portfolio this quarter. We view this favourably as it is the first positive reversion in a year and has signalled a turning point in the office market.


Vacancy risk at Ocean Financial Centre (OFC)

  • Although committed occupancy at Ocean Financial Centre (OFC) remained at 100%, we believe the large pre-termination fee received in 4Q17 is a harbinger of higher vacancy at the building. 
  • While negative, we believe there is sufficient lead time for the landlord to source replacement tenants. Ironically, a strengthening office market may even offer opportunities to lift rents at the vacated space.


Market rents: +3% q-o-q 

  • Preliminary estimates by CBRE showed a 3.2% uptick in Grade A office rents to SGD9.70 psf pm in 1Q18. 
  • With positive net absorption of 149k sf and no new office supply this quarter, island-wide vacancy improved by 25bps q-o-q to 5.9%.



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/ 2018-04-19
SGX Stock Analyst Report HOLD Maintain HOLD 1.190 Same 1.190



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