Keppel REIT - RHB Invest 2020-05-04: In a Relatively Better Position


Keppel REIT - In a Relatively Better Position

  • Among office REITs, Keppel REIT (SGX:K71U) stands in a relatively better position to weather COVID-19 due to its low exposure to retail, food & beverage (F&B), and tenants in affected office sub sectors. The low expiring rent for its office portfolio also presents a buffer in terms of lease negotiations.
  • Keep NEUTRAL with a new SGD1.07 Target Price from SGD1.23, 1% upside and c.5% yield.
  • We recommend investors to buy on dips, as Keppel REIT's current yields are still not attractive, in our view.

COVID-19: Only 6% of tenants fall under affected trade sectors

  • Only 6% of Keppel REIT's tenants fall under affected trade sectors, of which retail and F&B sectors take up c.1.8% of NLA. The rest are office sub-sectors like tourism-related technology, hospitality related, co-working & serviced offices, gyms, and medical clinics. Keppel REIT has so far provided c.SGD 9.5m in relief measures for tenants – including government property tax rebates of SGD 8.2m – and also offered cash flow relief for retail tenants by offsetting security deposits.
  • Among its office tenants, only a small proportion in the abovementioned trade sectors have asked for rental deferments – this is under consideration. Energy, oil, and gas tenants account for 4.3% of its portfolio, but – as these tenants are mainly on the trading side – they are not badly affected by the steep fall in oil prices.

Positive rent reversions still expected for 2020, leasing activities have paused.

  • Keppel REIT signed c.170,600sqf (attributable: 75,200sqf) of office leases in 1Q, with 54% of them being new leases. Demand drivers were the real estate, banking, insurance, and technology sectors.
  • Rent reversions during 1Q were strong at +18.8% (FY19 -17.6%), indicating a healthy office market before COVID-19 struck.
  • With only 4.9% of leases pending renewals this year, and average expiring rent remaining low at SGD9.37psf (market average: SGD11.50psf), management still expects positive rent reversions for the full year.
  • Keppel REIT's overall occupancy stands healthy at 98.9% (4Q19: 99.1%), but we expect longer transitional downtime for new leases.

311 Spencer St (311SS) still on track for completion by 2Q20.

  • Construction works at 311SS, where Keppel REIT has a 50% stake, are progressing at slower pace, but remain on track for completion by end 2Q20. Upon completion, the building will be let to Victoria Police on a 30- year lease and should contribute positively to bottomline.

No refinancing requirements until 2021.

  • Keppel REIT has already secured facilities to refinance the SGD400m in loans maturing this year, and only 8% of debt (SGD234m) is due in 2021.The REIT has a modest gearing of 36.2% and an interest cover ratio of 3.2x. ~79% of its debts are fixed.

Keppel REIT's earnings and TP changes.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-05-04
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.07 DOWN 1.230