Keppel REIT - Outlook Continues to be Mixed

Date: 15/07/2019

Source  :  CIMB
Stock  :  Keppel Reit       Price Target  :  1.41      |      Price Call  :  BUY
        Last Price  :  1.22      |      Upside/Downside  :  +0.19 (15.57%)

  • Keppel REIT's 2Q/1H19 DPU of 1.39/2.78 Scts makes up 23.7%/47.5% of our FY19 forecast.
  • Continues to enjoy positive rental reversion.
  • Maintain ADD with an unchanged Target Price of S$1.41.

Keppel REIT's 2Q/1H19 DPU at the Lower End of Our Expectations

  • Keppel REIT (SGX:K71U) reported a 22.7%/28.1% y-o-y drop in 2Q19 revenue and net property income to S$39.9m/S$31.1m due to a high base in 2018 from one-off income from early surrender of leases, divestment of a stake in OFC and income vacuum, particularly from Bugis Junction Tower, partly offset by maiden contributions from the acquisition of T Tower in Korea and capital top-up of S$3m.
  • Committed portfolio occupancy remained at 99.1% (vs. 1Q19’s 98.7%) with Singapore at 98.9%. 2Q/1H19 DPU of 1.39/2.78 Scts made up 23.7%/47.5% of our FY19 forecast.

Enjoying Positive Rental Reversions for Renewals

  • In 1H19 Keppel REIT leased/renewed 272,900 sqft of leases and rental of 15.8% (+178% in 2Q). Singapore estimated 40.5% of new lease demand came from technology, media and telco sectors and a further 22% office rental upcycle remains intact, the upward slowed a little.
  • Keppel REIT has a remaining 2.1% and 12.5% of gross rental income to be renewed/reviewed for the rest of 2019 and 2020. Expiring rents for the rest of 2019-2021 range between S$9.60 and S$10.70psf, still lower than current signing rents. As such, we anticipate the positive rental reversion trend to continue.

ORQ Occupancy for

  • In addition to UBS’s planned relocation Deutsche Bank (DB), one of Keppel REIT’s major exit from its global equities business.
  • According to management, the bank takes up 16% of ORQ and has an existing long lease at the property. Hence, we retain our estimates for now.

Healthy Balance Sheet

  • Post the purchase of T Tower and refinancing activities, Keppel REIT’s gearing ratio has ticked up to 38.4% at end-2Q19 although average interest cost dipped a little q-o-q to 2.86%. 92% of its debt are on fixed rate borrowings. Keppel REIT also bought back 9.7m units in 2Q.
  • Meanwhile construction of 311 Melbourne is ongoing and slated for debt in Melbourne, in our view.

Maintain ADD Rating

  • We leave our FY19-21F DPU estimates unchanged and maintain our ADD rating and DDM-based Target Price of S$1.41.
  • Potential catalysts are faster-than-expected backfilling of vacated office spaces.
  • Downside risks include slower office demand due to weaker macro outlook.

Source: CGS-CIMB Research - 15 Jul 2019

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