• Keppel REIT’s 3Q/9M DPU of 1.36 Scts/4.20 Scts were within our projections.
• Near-term dip in occupancy, rising Singapore office rental market to underpin DPU growth.
• Maintain ADD with unchanged DDM-based Target Price of S$1.34.

3Q/9M Results Highlights

Keppel REIT’s 3Q/9MFY18 results were largely within our expectations. 3Q distribution income fell 1.4% y-o-y due to a slight dip in portfolio occupancy to 98% as well as lower NPI margin. This was partly offset by higher interest income. 3Q/9M DPU of 1.36 Scts/4.20 Scts made up 23.6%/73% of our FY18 forecast, largely within our projections.

Keppel REIT also bought back 0.16% of its units in 3Q as part of its share buyback programme.

Positive Rental Reversion, Slight Dip in Singapore Occupancy

3Q committed portfolio occupancy of 98% was lower than the 99.3% in 2Q, dragged by lower Singapore occupancy of 97.8% as a result of higher vacancy at Ocean Financial Centre, Marina Bay Financial Centre and One Raffles Quay. The lower take-up was partly offset by higher take-up in Australia at 98.9%.

Keppel REIT renewed an attributable 855.3k sqft of space YTD (468.5k sqft in 3Q) with an average 8.7% positive rental reversion. Of this, 40% were new leases coming from government agencies, banking, insurance and financial services tenants. This lengthened its portfolio weighted average lease expiry to 5.7 years.

Management indicated that 70% of the vacated space at Ocean Financial Centre has been backfilled to date and we anticipate income to pick up towards 2019 as the replacement tenants occupy the space.

Continued Rise in Office Rental Cycle Underpins DPU Growth

Keppel REIT has a further 7% of space to be renewed/reviewed for the remainder of FY18 and a further 7.6% in FY19.

The outlook for the Singapore office market continues to be upbeat with limited new prime Grade A supply, especially in the CBD, and we anticipate rents to continue trending up. This should continue to drive DPU growth going forward.

Average Interest Cost Rose Marginally Q-o-q

Gearing stood at 39.1% as at end-3Q18, with weighted average debt maturity of 2.8 years. All-in interest cost rose marginally q-o-q to 2.8%. 

Keppel REIT has fixed 76% of its debt cost, which will mitigate the near-term impact of rising interest rates. Keppel REIT estimates that a 50bp hike in funding cost could erode DPU by 0.1 Scts.

Maintain ADD

We leave our FY18-20 DPU estimates unchanged. Our DDM-based Target Price is also unchanged at S$1.34 even as we roll forward our DDM assumptions to 2019 and assume a slightly higher cost of equity of 7.7%.

We maintain our ADD rating.

Upside risks include a faster-than-expected office rental recovery while downside risks include a slowdown in economic activity which could impact the appetite for office space.

Source: CGS-CIMB Research - 15 Oct 2018