• Maintain NEUTRAL, Target Price revised to SGD1.20 from SGD1.12, 5% downside.
• KEPPEL REIT (SGX:K71U)’s 2Q19 results are in line. Key positives ahead are strong rental growth potential and acquisition contributions, offset by downtime from tenant movements and absence of rental support.
• Valuations are fair, with FY19F yield of 4.4% (P/BV of 0.9x). We cut COE by 20bps to 7% to better reflect the prolonged low interest rate environment – which resulted in our higher Target Price.

Room for Organic Rental Rate Growth to Offset Lack of Income Support

• About 272,900 sqf (attributable ~112,600 sqf) of leases were signed in 1H19, with rental reversions coming in strongly at +15%.
• With average expiring rents for 2H19/2H20/2H21 expiring leases being at SGD10.70/9.70/9.60 psf (10-20% below current signing rates), we see good room for rental growth ahead. This, in our view, should help offset the absence of rental income support (~SGD8.6m for 2018) which were fully utilised by 1Q19.

Downtime Tenant

• UBS One Raffles Quay (ORQ), will be vacating the space to see strong demand for the space, considering the current market momentum – but there is likely to be an earnings void of ~3-6 months during the transition period.
• Similarly, HSBC Bay Financial Centre (MBFC) in May 2020, with the fit-out period commencing in 4Q19.
• Separately, Deutsche Bank, which has announced major restructuring plans for its Asia-Pacific operations, occupies ~200,000sqf at ORQ. Under the current lease term (which extends until 2025), management noted that the tenant will not be able to return the office space, but can potentially sub-lease some of its existing space.

Maiden Tower, 311SS to Contribute From 2H20 Onwards

• During 2Q, Keppel REIT completed the acquisition of T Tower in Seoul which contributed SGD1.3m for the quarter. The asset was acquired at an initial NPI yield of 4.7%.
• Construction of 311 Spencer Street (311 SS, 50% stake) is on track for completion by 1H20, with earnings contributions expected to kick in from 2H20 onwards.

Share Buybacks Limit

• Keppel REIT plans to continue its unit buy-back programme, as management still undervalued. During 2Q, it purchased and cancelled SGD1.26 unit.

DPU and Target Price Adjustments

• We revise FY19-21F DPU by 1%/-1%/2%, after on and occupancy changes.

Source: RHB Invest Research - 16 Jul 2019