Keppel REIT - UOB Kay Hian 2018-10-16: 3Q18 Steady Momentum In Singapore Office Segment


Keppel REIT - 3Q18: Steady Momentum In Singapore Office Segment

  • Results came in broadly in line, with 9M18 DPU of 4.20 S cents/share at 72% of our full-year estimate.
  • Keppel REIT continues to achieve high overall occupancy (98.0%) on the back of rising office rents and firm leasing momentum. During the quarter, Keppel REIT secured HSBC’s HQ relocation to MBFC Tower 2 on a 10-year lease.
  • Maintain BUY and target price of S$1.35.


Results broadly in line; 3Q18 DPU maintained at 1.36 S cents/share.

  • Keppel REIT (KREIT) reported 3Q18 DPU of 1.36 S cents/share, down 2.9% y-o-y, bringing 9M18 DPU to 4.20 S cents (down 1.6% y-o-y). 
  • 3Q18 net property income declined 10.9% y-o-y due to lower contributions from Ocean Financial Centre, 275 George Street and 8 Exhibition Street; partly mitigated by increased contributions from Bugis Junction Towers. 
  • Results were in line with expectations, with 9M18 DPU of 4.20 S cent accounting for 72% of our 2018 estimate.


Firm conditions in Singapore office portfolio.

  • Overall committed occupancy remained high at 98.0%. The committed occupancy of Singapore office stood at 97.8% (vs core CBD’s average of 94.6%) and committed occupancy of its Australian portfolio was 98.9% (vs Australia’s CBD average of 90.6%).
  • During the quarter, KREIT saw take-ups by HSBC at MBFC Tower 2, and government agencies at Bugis Junction Towers and One George Street in Australia. Tenant retention also increased to 84% in 9M18 (1H18: 77%).
  • In Singapore, new demand came mainly from the finance, insurance and flexible working space industries. In 3Q18, average grade-A office rental rate in Singapore rose to S$10.45psf pm (2Q18: S$10.10), vs Keppel REIT’s 9M18 average signing rent of S$10.88psf pm.
  • Keppel REIT also has a well-spread lease expiry, with 0.3% of portfolio NLA due for renewal in 2018 (6.0% in 2019) and 6.7% for review in 2018 (1.6% in 2019).

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HSBC’s HQ relocation to MBFC Tower 2.

  • In 3Q18, HSBC signed a 10-year lease (with rent review every five years). Fit-out works are expected to begin in 2H19 and occupation is targeted by Apr 20.
  • The signing on of HSBC adds to the stable of established tenants at MBFC (including Towers 1,2,3), which include DBS Bank, Standard Chartered Bank and BHP Billiton, and is a testament of the asset’s quality and appeal.
  • Although signing rents by HSBC are not disclosed, management noted that it attained positive rent reversion (vs existing passing rents). Asking rents in the vicinity are around S$12.50psf pm. HSBC’s HQ will be moving from its current premise at 21 Collyer Quay, where its current lease was signed at S$8.50psf pm (and recently extended for another year at S$11.51psf pm).

Promising prospects for Australia portfolio.

  • Management cited JLL, which reported healthy leasing activities across sectors in the finance, insurance and flexible working space industries. Prospects for the Australian office portfolio are promising, with vacancy of 1.1% (2Q18: 2.9%). Management highlighted 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.

3Q18 gearing stable at 39.1% (+0.5ppt).

  • The weighted average term to maturity of its debt is 2.8 years and its all-in interest rate cost is 2.80%. Some 76% of its debt is fixed-rate borrowings.
  • In terms of sensitivity, every 50bp change in the SOR translates to a 0.10 cent change in DPU (or 1.7% based on 2018 DPU).

Unit buy-back in progress.

  • Since initiation of the programme in 3Q18, the group has purchased and cancelled 5.3m units (ie 0.16% of total issued units). In view of the planned unit buy-backs, Keppel REIT will also be suspending its distribution reinvestment plan (DRP).


  • We retain our earnings estimates.


  • Maintain BUY and target price of S$1.35, based on DDM (required rate of return: 6.9%, terminal growth: 2%).


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

Peihao LOKE UOB Kay Hian Research | Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-10-16
SGX Stock Analyst Report BUY MAINTAIN BUY 1.350 SAME 1.350