Keppel REIT - RHB Invest 2019-01-22: DPU Weakness To Persist In The Near-Term


Keppel REIT - DPU Weakness To Persist In The Near-Term

  • KEPPEL REIT (SGX:K71U)'s 4Q18 results met. While rental reversion for 2018 came in strongly at 12.9% y-o-y, tapering rental support, past negative rent reversions, and lower occupancy have resulted in a persistent DPU decline over the quarters. This is expected to continue through 2019, with a recovery only expected in 2020.
  • While Keppel REIT's share price looks relatively cheap among S-REITs at 0.8x P/BV (sector average: 1.0x), we believe the underlying dividend yield of 4.7% is not compelling. 
  • Maintain NEUTRAL and SGD1.06 Target Price, 10% downside and 5% yield.

Slight delay in 311SS completion with contributions now expected to kick in by 2H20.

  • 311 Spencer Street (311SS), Melbourne is now expected to be completed in 2Q20 instead of 4Q19, due to the variance requested by the tenant – Assistant Treasurer for the State of Victoria. No additional capex is required from Keppel REIT as the cost will be borne by the developer, except that contributions would now kick in only by 2H20.
  • Recall, the 50% stake in the premium office tower was acquired in 4Q17 for AUD347.8m, with about AUD133m in progress payments still pending. The building has been be fully leased on a 30-year net lease, with average rental yield for the first 15 years at 6.4%.

Rental support tapering off, impacting DPU.

  • Keppel REIT has remaining SGD 2.7m in rental support income to be distributed in 2019, ~70% lower than the SGD8.6m paid in 2018.

Divestment of OFC stake mitigates gearing concerns but dents earnings.

  • In Dec 2018, Keppel REIT announced the divestment of 20% stake in Ocean Financial Centre (OFC) to Allianz Real Estate for SGD 537.3m. The agreed property value (100% basis) of SGD 2.7bn, is a 2.4% premium to the latest valuation (Nov 2018), and 17% higher than its purchase price. The move has helped in lowering its gearing to 36.3% (from 39.1% at 3Q18) thus reducing the need for potential equity fundraising. However, it has also further dented its underlying income, which has been declining due to past negative rent reversions, and lower income support.

Active share buyback limits downside.

  • Keppel REIT bought back 28m shares in 2018 below book value (SGD1.10-1.20 range), which has since been cancelled.
  • Management sees share buyback as a good tool to bridge Keppel REIT's share price discount to its NAV. The number of units that it can bought back is however capped by the Monetary Authority of Singapore’s creep rule, which limits to a maximum of 1.5% of outstanding shares over six months.

Results And Operations Review

4Q18 DPU down 4.9% y-o-y.

  • Keppel REIT's 4Q18 revenue and NPI were lower mainly due to weaker performance from OFC and Bugis Junction Towers. The lower rental support income and weaker performance from its associates and JV’s also impacted DPU. This was partially offset by divestment gains of SGD3m and one off contributions.
  • Overall, FY18 DPU was in line, accounting for 100% of our estimate.

No spike in interest cost expected.

  • About SGD538m (18% of its debt) is due for refinancing in 2019. Management expects interest cost to remain around the current levels of 2.8% pa, post refinancing. 85% of its debt is currently in fixed terms.

Portfolio occupancy improved

  • Portfolio occupancy improved slightly to 98.4% (3Q18: 98%) on the back of occupancy improvements at OFC and 8 Exhibition Street. Weighted average lease expiry (WALE) stands at 5.9 years, with only 4.2% of leases due for renewal in 2019.
  • For FY18, office portfolio registered modest revaluation gain of SGD33.2m, mainly due to 10-15bps compression in cap rates.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-01-22
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.060 SAME 1.060