Keppel REIT - CGS-CIMB Research 2020-07-20: Holding Steady

KEPPEL REIT (SGX:K71U)

Keppel REIT - Holding Steady

Keppel REIT's 2Q/1H20 DPU of 1.4/2.8 Scts was within expectations at 24.6%/49.1% of our FY20F.
Positive rental reversions, tenant relief measures total S$12.5m at end-2Q20.
Reiterate ADD with an unchanged DDM-based Target Price of S$1.20.

Keppel REIT (SGX:K71U) reported a 7.9% y-o-y decline in 2Q20 gross revenue due to the divestment of Bugis Junction Tower, lower contributions from Ocean Financial Centre, 275 George St, 8 Exhibition St and c.S$7m of property tax rebates and rental waivers extended to eligible tenants, partly offset by T Tower income. However, 2Q20 distribution income grew 0.4% y-o-y (DPU: 1.4 Scts), thanks to lower interest expense and capital distribution of S$5m.

Portfolio occupancy remains high at 98.6% as at end-2Q. Keppel REIT renewed/leased c.452.6k sq ft of space in 2Q20 at an average rental uplift of 14.2%, mainly due to higher rents achieved for rent review leases. Meanwhile, renewal leases were re-contracted at a more muted, but positive, single-digit level.
22.6% of leasing activity came from new demand, mainly from real estate, TMT and banking and financial services sectors. As at end-2Q20, Keppel REIT has 2.7% of leases to be renewed/reviewed in FY20F. Expiring rents for 2HFY20F average S$9.73psf, still slightly below current spot rents.
While the leasing environment remains challenging, new leases such as HSBC’s 10-year lease at MBFC in Singapore in May 2020 and the Victoria Police’s 30-year lease in Melbourne in Jul 2020, have commenced and these contributions should partly offset income vacuum from longer frictional vacancies from tenant movements such as UBS, in our view.

In terms of impact from COVID-19, Keppel REIT estimates that SME tenants make up 5.6% of its portfolio by NLA and qualify for tenant reliefs. These are largely tenants in Singapore and Australia. It estimates that tenant support measures including property tax rebates and rental waivers amount to c.S$12.5m as at end-2Q, of which c.S$7m has been reflected in 2Q20 results. It has also allowed S$1.6m of rents to be deferred.
In South Korea, none of Keppel REIT’s tenants qualify for mandatory relief measures.

Keppel REIT’s aggregate leverage stood at 36.3% as at end-2Q20. Average interest cost declined to 2.48% and interest cover was a healthy 3.5x at end-2Q. It has c.S$938m of undrawn credit facilities available including S$369m of committed facilities. This puts the group in a strong position to continue to evaluate accretive inorganic growth opportunities.

We leave our FY20-22F DPU estimates unchanged and maintain our DDM-based Target Price at 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 redeployment of divestment proceeds into new accretive acquisitions and a better-than-projected office rental market, 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 2020-07-20

SGX Stock Analyst Report ADD MAINTAIN ADD 1.200 SAME 1.200