Keppel REIT (KREIT) - UOB Kay Hian 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%).

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.

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).

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.

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.

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).

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.

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%.

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