Keppel REIT - CGS-CIMB Research 2020-04-22: Stable 1Q20 DPU

KEPPEL REIT (SGX:K71U)

Keppel REIT - Stable 1Q20 DPU

Keppel REIT's 1Q20 DPU of 1.4 Scts within expectations at 24.3% of our FY20F forecast.
Positive rental reversion in 1Q20, momentum likely to slow from 2Q.
Reiterate ADD with a lower DDM-based Target Price of S$1.20.

Keppel REIT (SGX:K71U) reported a 3.3%3.7% y-o-y decline in 1Q20 gross revenue and net property income due to the divestment of Bugis Junction Tower, smaller one-off income and lower contributions from 275 George St and 8 Exhibition St, partly offset by income from T Tower.
However, 1Q20 distribution income of S$47.3m and DPU of 1.4 Scts were relatively stable y-o-y, thanks to a capital distribution of S$5m.

Keppel REIT renewed/leased c.170.6k sq ft of space in 1Q20 at an average rental uplift of 18.8%. Singapore signing rents averaged S$12.16 psf, while 54% of leasing activity came from new demand from real estate, banking and financial services and the TMT sectors.
As at end-1Q20, Keppel REIT has 8.8% of leases to be renewed/reviewed in FY20.
The COVID-19 situation dampened leasing interest and rental growth momentum but management expects positive reversions to continue, albeit at a narrower gap, due to the low 2020-2022 expiring rents of S$9.37-10.20 psf. Management also shared that retail & F&B sectors make up c.1.8% of NLA while office tenants that are more impacted by lower footfall and tourism form about 4.5% of NLA.
To support its tenants in this challenging environment, Keppel REIT will fully pass through the property tax rebates to its office and retail tenants and give eligible retail tenants a full rental waiver for Apr 2020 as well as ability to utilise one month of security deposit to offset rent payment. These relief measures total S$9.5m.

Singapore committed portfolio occupancy stood at 98.8%. In FY20, two major leases will be commencing — namely HSBC’s 10-year lease at MBFC in Singapore in May 2020 and the Victoria Police’s 30-year lease in Melbourne by end-2Q20. This would help partly offset income vacuum from longer frictional vacancies from tenant movements such as UBS.

Keppel REIT’s aggregate leverage stood at 36.2% as at end-1Q20. It has obtained facilities to refinance its FY20 debt maturities and has c.S$966m of undrawn credit facilities available to meet future obligations. This puts the group in a strong position to continue to evaluate accretive inorganic growth opportunities.

We tweak down our FY20-22F DPU estimates by 3-7.5% to bake in the slower leasing environment and longer frictional vacancy periods going forward. As such, our DDM-based Target Price is lowered to S$1.20.
See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.
Potential catalysts would be a better-than-projected office rental market and redeployment of divestment proceeds into new accretive acquisitions, while downside risk would be longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-22

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