Keppel REIT - RHB Invest 2019-10-17: A Decent Quarter; Stay NEUTRAL


Keppel REIT - A Decent Quarter; Stay NEUTRAL

  • Maintain NEUTRAL, SGD1.23 Target Price, 1% downside.
  • KEPPEL REIT (SGX:K71U)’s 3Q19/9M19 results are in line. Key positives (3Q) are continued positive rental rate growth and divestment of Bugis Junction Towers at a premium to book value.
  • Key points to look out for are how quickly it can redeploy proceeds into higher-yielding assets, and its management of transitional vacancies and downtime arising from tenant movements in its properties (FY20).
  • Current valuations are fair, with the stock offering a 4.5% FY19F yield. See Keppel REIT's dividend history.

Positive rental reversions to continue despite softening office space demand.

  • Keppel REIT's rental reversions for 3Q19/9M19 remained strong at 14%/14.8%. Leasing momentum remained fairly strong with ~243,000 sqf (9M19: ~516,400 sqf) taken up, with 32% of demand coming from new leases and expansions, mainly in the technology and real estate services sectors.
  • Keppel REIT noted that while companies have become cautious on expanding their office spaces, many of its tenants also chose to renew their leases amidst tight market supply. With average expiring rental rates for FY20-22 at SGD9.59/9.53/10.00psf – well below the current market average – management is confident of achieving double-digit rental reversions in the near term.

Minimal exposure to co-working spaces.

  • Keppel REIT currently has minimal exposure to co-working tenants, at 0.2% of total portfolio cash rental income (post Bugis Junction Towers (BJT) divestment). Management is still seeing co-working operators expanding in the market and does not discount the possibility of having a good-credit co-working tenant in its portfolio in the future.

Australian acquisitions likely to offset Bugis Junction Towers income vacuum.

  • With the divestment of Bugis Junction Towers at an exit yield of 3% (see our 2 Oct note titled Keppel REIT - Divestment Of Bugis Junction Towers: Positive), near-term earnings contributions are likely to decrease slightly, but the revenue impact should be minimal – as the bulk of proceeds will be used to repay loans.
  • Management is actively looking at acquisitions in the near term, with Melbourne and Sydney being potential target destinations. With Australian central business district cap rates in the low-to-mid (c.4%) levels and borrowing costs at low levels (c.2%), we believe Keppel REIT should be able to make yield-accretive acquisitions in that market.
  • Gearing post divestment and final payment for its under-construction 311 Spencer Street, at ~35%, presents a debt headroom of SGD500m for acquisitions.

Share buybacks likely to accelerate with more firepower.

  • Management will continue to actively pursue DPU-accretive share buybacks from part of the divestment gain proceeds, as it believes that its stock remains undervalued. Since the initiation of the share buyback programme in 3Q18, management has bought back about 60m shares from the open market. See latest share buyback transactions.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-10-17
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.230 SAME 1.230