Keppel REIT - UOB Kay Hian 2018-04-19: 1Q18 KREIT In Line

REITs – Singapore - UOB Kay Hian 2018-04-19: 1Q18 KREIT (In Line) KEPPEL REIT K71U.SI

REITs – Singapore - 1Q18: KREIT (In Line)

  • Keppel REIT (KREIT)’s 1Q18 DPU declined 2.1% y-o-y, mainly on lower contributions from 275 George Street. 
  • Management guided an upbeat office sector outlook. 
  • Maintain BUY and target price of S$1.43.

Results in line with expectations. 

  • Maintain BUY and target price of S$1.43, based on DDM (required return: 6.7% and terminal growth of 2.5%). 
  • Keppel REIT (KREIT)'s 1Q18 DPU of 1.42 S cents was down 2.1% y-o-y, while gross revenue and NPI were S$39.7m and S$31.2m, down 0.3% y-o-y and 0.6% y-o-y respectively, mainly due to lower contributions from 275 George Street, but partially offset by increased contributions from Bugis Junction Towers, Ocean Financial Centre, 8 Exhibition Street, lower amortisation expense, lower trust expenses and net forex differences. 
  • Results were in line with our expectations, with 1Q18 DPU representing 24.1% of our full-year forecast.

Overall committed occupancy remained healthy at 99.4%. 

  • Committed occupancy of the Singapore office portfolio remained high at 99.8% (vs core CBD average occupancy of 94.1%). 
  • Committed occupancy of the Australian portfolio remained stable at 97.9% (vs national CBD office average occupancy of 89.6%).

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

  • Some 15% and 11.9% of its leases are for renewal and review in 2018-19 respectively. Of the 674,100sf (attributable area of 261,400sf) renewed, 23.3% were new leases, 10.5% were renewal leases, and 66.2% were review leases. 
  • Tenant retention remained high at 93% (4Q17: 95%).

New leases were signed with tenants from diverse sectors. 

  • In Singapore, the majority of the leases were from expansions in the legal sector, while in Australia, demand came from a government agency taking space at 275 George Street in Brisbane.
  • Overall, the new leases comprise mainly government agency (45.9%), legal (35%), TMT (5.9%), real estate & property services (5.5%), by attributable area. The average signing rents for Singapore office leases was around S$10.05psf pm.

Aggregate leverage remained stable at 38.6%. 

  • Weighted average term to maturity of borrowings was 3.2 years. Interest rate was stable at 2.75% with interest coverage ratio at 4.1x.

Improving office outlook in Singapore and Australia. 

  • Management cited property consultants' upbeat view of the Singapore office market, supported by improving confidence in the finance, energy and professional services sectors. The average Grade A rents continued to rise to S$9.70psf pm in 1Q18 (4Q17: S$9.40) due to strong demand from the insurance and TMT sectors, and flexible space providers, as reported by CBRE.
  • In Australia, JLL reported a marginal improvement in the national CBD office average occupancy to 89.6% (4Q17: 89.2%). The vacancy level is also at its lowest since 2013, driven largely by employment growth.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-19
BUY Maintain BUY 1.430 Same 1.430