Keppel REIT (KREIT) - UOB Kay Hian 2018-07-17: 2Q18 No Surprises; Good Momentum In Singapore Office Segment

Keppel REIT (KREIT SP) - UOB Kay Hian Research 2018-07-17: 2Q18 No Surprises; Good Momentum In Singapore Office Segment KEPPEL REIT SGX:K71U

Keppel REIT (KREIT SP) - 2Q18 No Surprises; Good Momentum In Singapore Office Segment

  • Keppel REIT (KREIT)’s results were broadly in line, with 2Q18 DPU of 1.42 S cents/share coming in at 24.1% of our full-year estimate.
  • KREIT continued to achieve high overall occupancy (99.3%) in 2Q18. Rising office rents on the back of firm leasing momentum and tight supply should underpin earnings going forward.
  • Maintain BUY and cut target price to S$1.35 (as we adjust our RFR to 2.75% from 2.5%).



RESULTS


Results broadly in line; 2Q18 DPU maintained at 1.42 S cents/share.

  • Keppel REIT (KREIT) reported a 2Q18 DPU of 1.42 S cents/share flat q-o-q and y-o-y), bringing 1H18 DPU to 2.84 S cents, down 1% y-o-y, due to lower contributions from 275 George Street. However, this was partially offset by higher property income from Bugis Junction Towers, Ocean Financial Centre and 8 Exhibition Street.
  • 2Q18 net property income rose 30% y-o-y, helped by an estimated one-off income of S$12m from the early surrender of leases.
  • Results were in line, with 2Q18 DPU of 1.42 S cents accounting for 24.1% of our 2018 estimate.


STOCK IMPACT


Firm conditions in Singapore office segment.

  • Overall committed occupancy remained high at 99.6%. The committed occupancy of Singapore offices stood at 99.9% (vs core CBD’s average of 94.1%) and committed occupancy of its Australian portfolio is at 97.1% (vs Australia’s CBD average of 90.1%). Tenant retention declined to 77% in 1H18 (vs 93.0% in 1Q18) due to the early surrender of leases at Ocean Financial Centre. However, we understand that more than half of the office space that was surrendered has been taken-up.
  • In Singapore, new demand was mainly from banks, insurance and financial services sector. In 2Q18, average grade A office rental rate in Singapore rose to S$10.10 psf pm, which compares to KREIT’s 1H18 average signing rent of S$10.74 psf pm. The group also has a well-spread lease expiry, with 2.9% of portfolio NLA for renewal in 2018 (10.2% in 2019) and 8.8% for review in 2018 (vs 1.6% in 2019).

Promising outlook in Australia.

  • Prospects for Australia office properties are also promising, with vacancy at the lowest levels since 2013 and with management highlighting that leasing enquiries are gravitating towards quality assets. 
  • The completion of 311 Spencer Street, Melbourne is expected in 4Q19, with a pre-committed occupancy of 100%, including a 30-year lease to Victoria Police that will commence upon completion of the development.

2Q18 gearing stable at 38.6% (no change compared to 1Q18).

  • This is expected to rise to 40.3% upon the expected completion of 311 Spencer Street in 2019. The weighted average term to maturity of debt is 2.9 years and KREIT’s all-in interest rate cost is 2.77%.
  • 77% of its debt is of fixed-rate borrowings and in terms of sensitivity, every 50bp change in swap offer rate (SOR) translates to a 0.10 S cents change in DPU (or 1.7% based on 2018 DPU). This report is shared at SGinvestors.io.

Downside protected by unit buy-backs.

  • Interestingly, the group also intends to initiate unit buy-backs (up to 1.5% of issued units over 6 months) as part of its proactive capital management strategy. 
  • In view of the planned unit buy-backs, KREIT will suspend the distribution reinvestment plan (DRP).


EARNINGS REVISION

  • We fine-tuned our 2018-20 DPU forecasts marginally by -1% to -3%, mainly adjusting our assumptions on new units being issued (ie for payment of management fees and distribution reinvestment plan) and trimming our occupancy forecast (by 0-10bp) for the 275 George Street property.


VALUATION/RECOMMENDATION

  • Maintain BUY but cut target price to S$1.35 (from S$1.43 previously), as we raise our risk free rate (RFR) assumption to 2.75% from 2.5% previously. Our terminal growth assumption is unchanged at 2%.


SHARE PRICE CATALYST

  • Higher office rentals in Singapore and Australia.
  • Positive newsflow on leasing activity, employment and economic growth.
  • Compression in office cap rates.





Andrew CHOW CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2018-07-17
SGX Stock Analyst Report BUY Maintain BUY 1.35 Down 1.430



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