Keppel REIT - UOB Kay Hian 2019-01-22: 4Q18 Slightly Below


Keppel REIT - 4Q18 Slightly Below

  • 4Q18 is a trough for Keppel REIT due to negative rental reversion as Grade A office rents peaked three years ago at S$11.30-11.40psf pm. This year, Keppel REIT will also benefit from full-year impact of leases renewed at higher rents in 2018.
  • Maintain BUY. Target price: S$1.35.

Results slightly below expectations.

  • KEPPEL REIT (SGX:K71U) reported 4Q18 DPU of 1.36 cents, down 4.9% y-o-y (FY18: -2.5% y-o-y). Contributions from Marina Bay Financial Centre (MBFC), One Raffles Quay (ORQ) and Ocean Financial Centre (OFC) declined 15.1% y-o-y, 14.9% y-o-y and 16.6% y-o-y respectively due to negative rental reversion as Grade-A office rents were higher at S$10.40-11.40psf pm three years ago in 2015.
  • Income from four Australian properties declined 11.4% y-o-y due to a 7.7% y-o-y depreciation of A$ against S$, and asset enhancement at 275 George Street in Brisbane.
  • 4Q18 distributable income was boosted by capital gains of S$3m.

Benefitting from recovery in office rentals.

  • Keppel REIT completed 130 committed leases with attributable NLA of 1,227,100sf in 2018 (4Q18: 39 committed leases with attributable NLA of 371,800sf). It achieved average signing rent for Singapore office leases of S$11.10psf pm for 2018, up 12.9% y-o-y. The bulk of new leasing demand came from financial services, government agencies and energy & resources.
  • Management strives to maintain a balance between achieving high occupancy and maximising returns from assets. According to CBRE, average Grade-A office rents increased 3.4% q-o-q to S$10.80psf pm in 4Q18.

Capital gains from divesting 20% of OFC.

  • Keppel REIT divested a 20% stake in OFC to Allianz Real Estate for S$537.3m in Dec 18. OFC was valued at 2,985psf. Keppel REIT realised capital gains of S$77.1m, which could be utilised to enhance distribution to shareholders and also support its share buyback programme.
  • Keppel REIT has purchased and cancelled 28.3m issued units in 2018. Management intends to renew its mandate for share buyback during the upcoming AGM.

Divestment supports deleveraging.

  • Keppel REIT’s portfolio has shrunk 4.8% to S$8.1b due to the divestment of 20% stake in OFC. A portion of the proceeds from the divestment was utilised to repay S$300m of loans in 4Q18. Thus, aggregate leverage was lowered by 2.8ppt q-o-q to a healthy 36.3%.
  • Keppel REIT is well supported by its bankers and has received commitments to refinance its loans due in 2019.

Expansion Down Under.

  • The development of 311 Spencer Street in Melbourne is progressing smoothly. Superstructure for 24 floors was already completed. The 30-year lease to the Victoria Police will commence when the building is completed in 1H20. The building will provide recurrent income stream with fixed annual rental escalations.
  • Keppel REIT will also pursue asset enhancement for 8 Exhibition Street at Melbourne, including upgrading the foyer and lifts in 1H19.

Turnaround in sight.

  • We see 4Q18 as a trough as Grade-A office rents peaked three years ago at S$11.30-11.40psf pm. This year, Keppel REIT will also benefit from full-year impact of leases renewed at higher rents in 2018. Share price could also be supported by its share buyback programme.

Jonathan KOH UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-01-22
SGX Stock Analyst Report BUY MAINTAIN BUY 1.350 SAME 1.350