Keppel REIT - CGS-CIMB Research 2018-10-15: A Bit Of Near-Term Hiccup


Keppel REIT - A Bit Of Near-Term Hiccup

  • Keppel REIT’s 3Q/9M DPU of 1.36 Scts/4.20 Scts were within our projections.
  • Near-term dip in occupancy, rising Singapore office rental market to underpin DPU growth.
  • Maintain ADD with unchanged DDM-based Target Price of S$1.34.

3Q/9M results highlights

  • Keppel REIT’s 3Q/9MFY18 results were largely within our expectations. 3Q distribution income fell 1.4% y-o-y due to a slight dip in portfolio occupancy to 98% as well as lower NPI margin. This was partly offset by higher interest income. 3Q/9M DPU of 1.36 Scts/4.20 Scts made up 23.6%/73% of our FY18 forecast, largely within our projections.
  • Keppel REIT also bought back 0.16% of its units in 3Q as part of its share buyback programme.

Positive rental reversion, slight dip in Singapore occupancy

  • 3Q committed portfolio occupancy of 98% was lower than the 99.3% in 2Q, dragged by lower Singapore occupancy of 97.8% as a result of higher vacancy at Ocean Financial Centre, Marina Bay Financial Centre and One Raffles Quay. The lower take-up was partly offset by higher take-up in Australia at 98.9%.
  • Keppel REIT renewed an attributable 855.3k sqft of space YTD (468.5k sqft in 3Q) with an average 8.7% positive rental reversion. Of this, 40% were new leases coming from government agencies, banking, insurance and financial services tenants. This lengthened its portfolio weighted average lease expiry to 5.7 years.
  • Management indicated that c.70% of the vacated space at Ocean Financial Centre has been backfilled to date and we anticipate income to pick up towards 2019 as the replacement tenants occupy the space.

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Continued rise in office rental cycle underpins DPU growth

  • Keppel REIT has a further 7% of space to be renewed/reviewed for the remainder of FY18 and a further 7.6% in FY19.
  • The outlook for the Singapore office market continues to be upbeat with limited new prime Grade A supply, especially in the CBD, and we anticipate rents to continue trending up. This should continue to drive DPU growth going forward.

Average interest cost rose marginally q-o-q

  • Gearing stood at 39.1% as at end-3Q18, with weighted average debt maturity of 2.8 years. All-in interest cost rose marginally q-o-q to 2.8%. 
  • Keppel REIT has fixed 76% of its debt cost, which will mitigate the near-term impact of rising interest rates. Keppel REIT estimates that a 50bp hike in funding cost could erode DPU by 0.1 Scts.

Maintain ADD

  • We leave our FY18-20 DPU estimates unchanged. Our DDM-based Target Price is also unchanged at S$1.34 even as we roll forward our DDM assumptions to 2019 and assume a slightly higher cost of equity of 7.7%.
  • We maintain our ADD rating.
  • Upside risks include a faster-than-expected office rental recovery while downside risks include a slowdown in economic activity which could impact the appetite for office space.

LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2018-10-15
SGX Stock Analyst Report ADD MAINTAIN ADD 1.340 SAME 1.340