KEPPEL REIT (SGX:K71U)
Keppel REIT - A New Beginning
- Keppel REIT achieved positive rental reversion of 12.9% in 2018. This year, Keppel REIT will benefit from full-year impact of leases renewed at higher rents in 2018.
- In Australia, the 30-year lease to the Victoria Police will commence when 311 Spencer Street in Melbourne is completed in 1H20. MBFC will contribute the last tranche of income support in 1Q19. Thereafter, Keppel REIT would be providing clean distribution to shareholders, unadulterated by income support.
- Maintain BUY. Target price: S$1.35.
WHAT’S NEW
Benefitting from recovery in office rentals.
- KEPPEL REIT (SGX:K71U) completed 130 committed leases with attributable NLA of 1,227,100sf in 2018 (4Q18: 39 committed leases with attributable NLA of 371,800sf). Tenant retention was high at 83%.
- Keppel REIT achieved average signing rent for Singapore office leases of S$11.10psf pm for 2018 (2017: S$9.80psf pm), representing positive rental reversion of 12.9%. The bulk of new leasing demand came from financial services (25%), government agencies (24.9%) and energy & resources (16.7%).
- Management conservatively renewed the leases expiring in 2019 ahead in 2018. The proportion of leases expiring in 2019 was 4.2% of attributable area as of Dec 18, much lower than 10.2% in Jun 18. Average signing rent was S$10.05psf pm in 1Q18 but surged to above S$11psf pm in 2Q18-4Q18. This year, Keppel REIT will benefit from full-year impact of leases renewed at higher rents in 2018.
- HSBC has signed a 10-year lease with two 5-year extension options for 140,000sf of Grade A office space at MBFC Tower 2. Fit-out is expected to commence in 2H19. HSBC is scheduled to relocate from 21 Collyer Quay to MBFC Tower 3 in Apr 20.
Expansion Down Under.
- The development of 311 Spencer Street in Melbourne is progressing smoothly with the superstructure for 24 floors 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. It provides NPI yield of 6.4%.
- Occupancy at 275 George Street in Brisbane improved by a significant 5.9ppt q-o-q to 99.3% in 3Q18 as Keppel REIT secured long-term lease from a new government tenant.
- Keppel REIT will also pursue asset enhancement for 8 Exhibition Street in Melbourne, including upgrading the foyer and lifts in 1H19.
Capital gains from divesting 20% of OFC.
- Keppel REIT divested a 20% stake in Ocean Financial Centre (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 support its share buyback programme.
Divestment supports deleveraging.
- Keppel REIT’s portfolio has shrunk 4.8% to S$8.1b due to the divestment of a 20% stake in OFC. A portion of the proceeds from the divestment was used to repay S$300m of loans in 4Q18. Thus, aggregate leverage was lowered by 2.8ppt q-o-q to a healthy 36.3% in 4Q18.
- Keppel REIT is well supported by its bankers. Of the loan of S$698m maturing in 2019, Keppel REIT has received commitments to refinance S$160m.
Sussing acquisitions overseas.
- Keppel REIT has a track record of operating in Australia for eight years. We expect Keppel REIT to continue to scale up in Australia.
- Keppel REIT will evaluate expanding into a third developed country within the Asia Pacific region that offers stable growth. We believe South Korea is an ideal candidate as sponsor Keppel Land, through subsidiary Alpha Investment Partners, has ground presence in South Korea.
Unlocking value through share buyback.
- Keppel REIT has purchased and cancelled 28.3m issued units in 2018. Management believes the stock is undervalued and intends to renew its mandate for share buyback during the upcoming AGM in April. Keppel REIT is restricted to buy back up to 1.5% of issued units over a 6-month period to comply with the Code on Takeovers and Mergers.
STOCK IMPACT
A new beginning.
- MBFC will contribute the last tranche of income support of S$2.7m in 1Q19. Thereafter, Keppel REIT would be providing clean distribution to shareholders, unadulterated by income support.
Strong defensive qualities.
- Keppel REIT’s WALE was 5.9 years as of Dec 18, already one of the longest WALE for Singapore REITs. WALE would be longer at 8.3 years if we include 311 Spencer Street.
EARNINGS REVISION/RISK
- We maintain our earnings forecasts.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$1.35 is based on DDM (required rate of return: 6.25%, terminal growth: 2.0%).
SHARE PRICE CATALYST
- Positive newsflow on rising retail rentals, yield-accretive acquisitions, redevelopment or asset enhancement opportunities.
Jonathan KOH CFA
UOB Kay Hian Research
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Peihao LOKE
UOB Kay Hian
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https://research.uobkayhian.com/
2019-03-07
SGX Stock
Analyst Report
1.350
SAME
1.350
