Highlights

Keppel REIT - 2Q19 Decent Performance Despite High Base

Date: 16/07/2019

Source  :  UOB KayHian
Stock  :  Keppel Reit       Price Target  :  1.37      |      Price Call  :  BUY
        Last Price  :  1.04      |      Upside/Downside  :  +0.33 (31.73%)
 


  • KEPPEL REIT (SGX:K71U)'s 2Q19 DPU of 1.39 cents is in line with our expectations and a decent performance despite the high base created by one-off income of S$12m from the early termination of leases in 2Q18.
  • We expect Keppel REIT to maintain positive rental reversion for its Singapore office portfolio. 311 Spencer will start contributing upon completion in 1H20.
  • Keppel REIT has capital gains of S$105m available to top up distribution or be deployed in share buyback.
  • Maintain BUY and target price of S$1.37.

2q19 Results

Results in line with expectations.

  • KEPPEL REIT (SGX:K71U)’s reported 2Q19 DPU of 1.39 cents (-2.1% y-o-y), bringing 1H19 DPU to 2.78 S cents (-2.1% y-o-y).
  • Property income declined 22.7% y-o-y due to a high base as a result of one-off income of S$12m received from the early surrender of leases.
    • Contribution from Ocean Financial Centre (OFC) declined 31.6% y-o-y as Keppel REIT divested a 20.1% stake in OFC in Dec 18.
    • Contribution from Bugis Junction Towers declined 21.6% y-o-y as key tenants Keppel Land and Keppel Capital have shifted out (management indicated that new tenants will shift in and start contributing in 3Q19).
    • Income contribution from One Raffles Quay (ORQ) declined 6.7% y-o-y on a lower occupancy of 97% (2Q18: 100%).
    • Income contribution from Marina Bay Financial Centre (MBFC) was stable at S$20.1m.
  • Contribution from JVs declined 2.7% y-o-y due to depreciation of the A$. T Tower made maiden contribution of S$1.3m after the acquisition was completed in May 19. There was no rental support in 2Q19.
  • Distribution income was bolstered by capital gains of S$3.0m.

Stock Impact

Expect continued positive rental reversion.

  • According to CBRE, Singapore disclosed that the average rents for expiring leases are S$10.70psf pm for 2019, S$9.70psf pm for 2020 and S$9.60psf pm for 2021. Thus, Keppel REIT is likely to maintain positive rental reversion for its Singapore office portfolio.
  • Committed occupancy was 98.9% for Singapore and 99.5% for Australia as at Jun 19. T Tower is fully occupied.

Pockets of ORQ.

  • UBS is expected to vacate Suntec City Penang Road (NLA: 381,000sf). Keppel REIT has received enquiries for the vacated space and discussions are on-going. Management expects new leases to be committed by end-19.
  • Deutsche Bank occupies seven floors at ORQ (200,000sf or 16% of total NLA). Management expect Deutsche Bank’s restructuring to affect the bank’s Hong Kong operations, more so than Singapore.

Acquisition of 99.4% in T Tower has been completed

  • Acquisition of 99.4% in T Tower has been completed and extends Keppel REIT’s footprint into Seoul (South Korea accounts for 3.6% of Keppel REIT’s S$8.4b commercial portfolio). With an NPI yield of 4.7%, T Tower is expected to boost pro-forma 2018 DPU by 2.5% to 5.70 S cents, based on debt financing. Transacted price is also attractive, which is at a 2.5% discount to an independent valuation by C&W. T Tower was completed in 2010 (226,945sf in attributable NLA), and enjoys 100% committed occupancy.
  • The outlook for Seoul’s office market appears robust, with office investments reaching a historical high in 2018 amid ample liquidity and positive investment sentiment. Management cited JLL which expects CBD Grade A occupancy to decline 1.3ppt to 81.9% in 2020 before rising in subsequent years on lack of new supply.

Development of 311 progress.

  • The freehold Grade A office building will be 100% leased to Victoria Police for 30 years, upon completion expected in 1H20 (rental income to start flowing through).

Australia CBD Office to see further improvements.

  • According to JLL, Australia’s absorption across Sydney and Melbourne also saw occupancies rise to 964% (+0.4ppt q-o-q) and 976% (+0.6ppt q-o-q) respectively. Sydney CBD is seeing steady leasing demand and limited supply. For Melbourne CBD, vacancy is expected to remain tight as majority of projects have been pre-committed.

Proactive capital management.

  • Management has undertaken measures to extend debt maturity and manage interest costs, and have managed to refinance all 2019 loans. Keppel REIT issued S$200m in 5-year convertible bonds at 1.9% coupon rate to lower interest costs as well as fund the acquisition of T Tower in Seoul.
  • Keppel REIT also obtain its first green loan facility of S$505m, of which proceeds were used to refinance loans maturing in 2022.
  • 2Q19 gearing stable at 38.4% (+2.7ppt y-o-y). The weighted average term to maturity of its debt has been extended from 3.3 to 3.7 years. Its all-in interest rate is 2.86%. 92% of its debt is fixed-rate borrowings.

Active share buyback programme.

  • Keppel REIT has purchased and cancelled 9.7m issued units. Management would continue the share buyback programme so long as unit price is below NAV of S$1.36/share. Keppel REIT has capital gains of S$105m available to top-up distribution to unitholders, or alternatively could be deployed in its share buyback programme.

Earnings Revision

  • We retain our earnings estimates.

Valuation / Recommendation

  • Maintain BUY and target price of S$1.37, based on DDM (required rate of return: 6.25%, terminal growth: 2.0%).

Share Price Catalyst

  • Higher office rentals in Singapore and Australia.
  • Positive newsflow on leasing activity, employment and economic growth.
  • Compression in office cap rates.

Source: UOB Kay Hian Research - 16 Jul 2019

Share this
Labels: Keppel Reit

Related Stocks

Chart Stock Name Last Change Volume 
Keppel Reit 1.04 0.00 (0.00%) 1,916 

  Be the first to like this.
 


APPS
I3 Messenger
Individual or Group chat with anyone on I3investor
 
 

95  89  145  774 

ActiveGainersLosers
Top 10 Active Counters
 NameLastChange 
 Jiutian Chemical 0.088+0.003 
 QT Vascular 0.009+0.001 
 Sembcorp Marine 0.138-0.001 
 Pan Asian 0.049+0.002 
 Samko Timber 0.038+0.002 
 Secura 0.075+0.001 
 Suntec Reit 1.48+0.01 
 OEL 0.02+0.001 
 Hosen 0.059-0.002 
 NetLink NBN Tr 0.96-0.01