Keppel REIT - CGS-CIMB Research 2018-07-16: Riding Along With The Positive Sector Outlook

Keppel REIT - CGS-CIMB Research 2018-07-16: Riding Along With The Positive Sector Outlook KEPPEL REIT SGX:K71U

Keppel REIT - Riding Along With The Positive Sector Outlook

  • Keppel REIT's 1HFY18 DPU of 2.84 Scts came in within our expectations at 49% of our full-year forecast.
  • Committed occupancy rate in 2QFY18 remained high with positive rental reversions.
  • We expect further office sector recovery to drive earnings growth.
  • The bulk of Keppel REIT’s debt is on fixed rate terms.
  • We maintain our ADD rating and DDM-based Target Price of S$1.34.

2QFY18 results highlights

  • Keppel REIT (KREIT)’s 2Q18 results were within expectations. Gross revenue, excluding one-off income from early surrender of leases amounting to $12m, declined by 0.5% while distribution income was fairly stable at S$48.3m in 2Q18 vs. S$47.4m last year. 2Q18 DPU declared was 1.42 Sct, same as last year.
  • During the quarter, Bugis Junction Tower, Ocean Financial Centre and 8 Exhibition St in Australia delivered better results y-o-y which helped to offset weaker earnings from 275 George St and other Singapore properties.

Stronger re-contracted rents

  • The trust renewed/leased an attributable 386,800 sq ft of NLA in 2Q18 or c.10.5% of its portfolio with a retention rate of 77%. Despite the lower retention rate in 2Q18, committed occupancy rate stayed high at 99.3% with the space from the early termination by one of its tenants in the financial services industry having been filled. This report is shared at SGinvestors.io.
  • Singapore leases (81.9% of total expiries) were re-contracted at an avg. S$10.74 psf in 1H18 vs. S$10.05 psf in 1Q18. Some 44.7% of the committed leases were review leases while new leases made up another 39.7%. The bulk of Singapore demand was from the banking, insurance and financial services sectors, while in Australia, demand was from a government agency.

Further office rent recovery to drive earnings growth

  • Keppel REIT has a remainder 11.7% of leases due for renewal/review in FY18 and a further 11.8% in FY19. Singapore Grade A office rental continued to rise in 2Q18 to S$10.10 psf from S$9.70 psf in 1Q18. Hence, we anticipate further rental reversions when these leases are renewed.
  • We are expecting a 15% y-o-y pick-up in spot rents for 2018F which should continue to underpin its DPU growth going forward.

Bulk of debts on fixed rate borrowings

  • Gearing stood at 38.6% as at end-2Q18, with weighted average debt maturity of 2.9 years. All-in, interest rate was a little higher q-o-q at 2.77% post refinancing of S$425m in loans in 1Q.  This report is shared at SGinvestors.io.
  • 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. Keppel REIT estimates that a 50bp uptick in funding cost could erode its DPU by 0.1 Scts.

Maintain ADD

  • We leave our FY18-20 DPU estimates unchanged and maintain our DDM-based Target Price at S$1.34 (cost of equity: 7.55%). We maintain our ADD call.
  • With the sustained office market recovery, there could potentially be upside risks to our estimates which will further catalyse Keppel REIT’s share price performance.
  • Downside risk is a slowdown in economic activity, which could derail the appetite for office space. 
  • Keppel REIT will be initiating its share buyback programme of up to 1.5% of the issued units, indicating that the management is of the view that the stock is undervalued.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-16
SGX Stock Analyst Report ADD Maintain ADD 1.340 Same 1.340