Keppel REIT 1Q20 - UOB Kay Hian 2020-04-23: Sincere Commitment To Provide Stable DPU

KEPPEL REIT (SGX:K71U) | SGinvestors.io KEPPEL REIT (SGX:K71U)

Keppel REIT 1Q20 - Sincere Commitment To Provide Stable DPU

  • Keppel REIT reported good results with DPU increasing 0.7% y-o-y to 1.40 S cents in 1Q20, supported by capital distribution of S$5.0m. Keppel REIT achieved average signing rents of S$12.16psf pm, representing positive rental reversion of 18.8%.
  • Management expects Keppel REIT to maintain positive rental reversion for the rest of 2020. Keppel REIT intends to keep distribution stable, topping up with capital distribution to smooth out DPU.
  • Keppel REIT trade at P/NAV of 0.74x. Maintain BUY. Target: S$1.30.



Keppel REIT 1Q20 RESULTS

  • Keppel REIT (SGX:K71U) reported distributable income of S$47.3m (our forecast: S$43.4m) and DPU of 1.40 S cents (our forecast: 1.3 S cents) for 1Q20, which were in line with our expectations. 1Q20 DPU represents 25.2% of our 2020 forecast.

Achieved strong positive rental reversion of +18.8% in 1Q20.

  • Management expects rental reversion to remain positive at high-single to low-double digits in subsequent quarters. For Singapore, average signing rents was S$12.16psf pm in 1Q20 (vs Grade-A Core CBD average of S$11.50psf pm). Income contribution from Ocean Financial Centre (OFC) grew 6.4% y-o-y but declined 14.1% for Marina Bay Financial Centre (MBFC) due to absence of rental support.
  • Occupancy for OFC and MBFC remained high at 98.8% (up 0.4ppt q-o-q) and 99.1% (up 0.2ppt q-o-q) respectively. T Tower contributed income of S$3.4m.

Slower leasing activity.

  • New demand from Real Estate (55%), Financials (22.8%), and Technology, Media & Telecommunications (10.7%) made up the bulk of the new leases committed. New and Renewal leases accounted for 53.7% and 46.3% of leases committed this quarter.
  • Retention rate was lower at 50% (vs 75% in 2019), due to non-renewals at 275 George Street (occupancy down 1.5ppt q-o-q to 98.1%), MBFC and One Raffles Quay (ORQ). Majority of these spaces have since been committed.

Minimal renewal and rent review in 2020.

  • Leasing has slowed due to stoppage of site visits. Companies have also become more cautious on expansion and relocation. Fortunately, Keppel REIT has only remaining 4.9% of leases expiring and 3.9% due for rent review in 2020. Management expects leasing activities to pick up in 4Q20.
  • The resiliency of its office portfolio is supported by long weighted average lease expiry (WALE) of 4.7 years (top 10 tenants: 6.7 years). Its tenant base is largely anchored by established blue-chip tenants.

Bulk of tenants provides essential services.

  • Management estimated that Retail & F&B tenants and affected office sub-sectors (tourism-related, hospitality-related, co-working & serviced offices, gyms and etc), which make up respective 1.8% and 4.5% of attributable NLA, are at risk and are likely to request for rent deferrals.


STOCK IMPACT

  • Singapore office to maintain positive reversions. Current signing rents are comfortably above average expiring rents in 2020 (S$9.37psf pm), 2021 (S$9.75psf pm), and 2022 (S$10.20psf pm). Keppel REIT should maintain positive reversions for its Singapore office portfolio in 2020 and 2021.
  • Minimal exposure to co-working. Co-working operators accounted for 0.8% of Keppel REIT’s NLA and 0.7% of gross rental income.
  • Australia nationwide CBD office occupancy remained stable at 91.7% (-0.2ppt q-o-q) at end-Dec 19. Office CBD occupancy in Sydney was stable at 95.2% (flat q-o-q), while Brisbane saw slightly lower occupancy at 91.5% (-1.7% ppt). Occupancies for Melbourne CBD and Perth CBD rose slightly to 98.2% (+0.3ppt q-o-q) and 86.5% (+0.9ppt q-o-q) respectively.
  • 311 Spencer Street, Melbourne to start contributing in 2Q20. The 40-storey freehold Grade-A office building has already topped out with completion of building structure. Construction works are continuing at 311 Spencer Street but at a slower pace. Management expects handover of the building by end-2Q20. The buildings will be leased to Victoria Police for 30 years commencing in 2Q20. The lease has fixed annual escalation of 2-4% per year. Management expects 311 Spencer Street to generate NPI yield of 6.4% on development cost of S$362.4m.
  • National Cabinet in Australia has approved Mandatory Code of Conduct for commercial tenancies. Keppel REIT is not affected as most of its tenants are large corporations. Less than 5% of its NLA is occupied by SMEs with revenue of less than A$50m.
  • Aims to maintain stable distribution. Keppel REIT intends to keep distribution stable, topping up with capital distribution to smooth out DPU. It has capital gains available from past divestments of S$452m, which could be utilised to support future distribution. Management does not intend to withhold distribution.
  • Gearing stable at 36.2%. Keppel REIT has refinanced the majority of its loans due in 2020. It has S$966m of undrawn credit facilities, of which about S$400m are committed facilities. The weighted average term to maturity of its debt has increased slightly from 3.4 to 3.8 years.


EARNINGS REVISION

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Positive rental reversion for office properties in Singapore.
  • Contributions from 311 Spencer Street in Melbourne, Australia.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-23
SGX Stock Analyst Report BUY MAINTAIN BUY 1.300 SAME 1.300



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