• KEPPEL REIT (SGX:K71U) reported good results with maiden full-quarter contribution of s$3.5m from T Tower. Contributions from MBFC and ORQ also increased by 7.5% and 6.2% y-o-y respectively. See Keppel REIT announcements.
• Keppel REIT achieved signing rents of S$12.35psf pm and retention rate is higher at 78% in 9M19. Management expressed confidence in maintaining positive double-digit rental reversion in 2020. Keppel REIT trades at P/B of 0.92x. See Keppel REIT share price.
• Maintain HOLD. Target: S$1.21. Entry price: S$1.10.

3q19 Results

• KEPPEL REIT (SGX:K71U)’s 3Q19 DPU of 1.40 S cents (+2.9% y-o-y) was in line with our expectations. See Keppel REIT dividend history.

Full quarter’s contribution from T Tower.

• The good results were underpinned by maiden full-quarter contribution of S$3.5m from T Tower in Seoul and higher average portfolio rentals, which more than offset the absence of rental support and sale of 20% stake in OFC.

Growth from Marina Bay Financal Centre (MBFC) and One Raffles Quay (ORQ).

• Contribution from associates and JVs increased 14.2% y-o-y due to contributions from MBFC (+7.5% y-o-y) and ORQ (+6.2% y-o-y). Contributions from 8 Exhibition Street in Melbourne and David Malcom Justice Centre in Perth declined by 5.6% and 2.3% y-o-y respectively, affected by the 5.9% y-o-y depreciation of the A$ against S$.
• Distribution income was also bolstered by capital gains distribution of S$2.0m.

Stock Impact

Continued positive rental reversion for SG portfolio.

• With high SG portfolio occupancies at 98.5% (-0.4ppt q-o-q), management guided that there is still room to push for higher rents. Keppel REIT achieved positive rental reversion of 14% in 3Q19. Average signing rents was committed at S$12.35psf pm in 9M19 (vs Grade-A core CBD average of S$11.45psf pm in 3Q19), higher than S$11.93psf pm for 1H19.
• Current signing rents are comfortably above average expiring rents in 2020 (S$9.59psf pm), 2021 (S$9.53psf pm), and 2022 (S$10.00psf pm). Thus, management expressed confidence in maintaining positive double-digit rental reversion in 2020.
• New leasing demand was led by Technology, media and telecommunications, real estate and property services, and banking, insurance and financial services, which represented 31.0%, 19.4%, and 18.9% of new leases committed respectively.
• New, renewal, and review leases made up 32%, 62%, and 6% of leases committed this quarter. Retention o higher at 78% in 9M19 (vs 64% in 1H19), as a number of corporates have decided to stay put.

Pockets of potential weakness at ORQ.

• UBS is expected to vacate ORQ (17% of total NLA) in Dec 20, and they are expected to consolidate from ORQ (NLA: 230,000sf) and Suntec City (NLA: 90,000sf) to 9 Penang Road (NLA: 381,000sf). Management noted only a small portion of UBS’ space has been signed, given that they are still 15 months away from UBS actually vacating the space.
• Deutsche Bank is in the midst of restructuring but the tenant has not indicated any intention to return office space. Deutsche Bank’s lease expires in 2025 but there is a rent review next year in 2020.

Exposure to co-working not significant.

• Co-working operators, such as WeWork, accounted for only 0.8% of attributable NLA and 0.7% of gross rent (0.2% post-divestment of Bugis Junction Tower).

Milestone achieved for development of 311 Spencer.

• The 40-storey freehold Grade-A office building has achieved milestone of topping out and completion of the building structure. It will be internally fitted out in the coming months. The buildings will be leased to Victoria Police for 30 years, commencing in 2Q20 and providing Keppel REIT with a steady income stream.

Australia nation-wide CBD office occupancy remains stable.

• According to JLL, national CBD office occupancy remained stable, with market occupancy of 91.7% in Jun 19 (vs 91.4% at Dec 18). Office CBDs across Sydney and Melbourne also saw occupancies stabilising at 95.9% (-0.5ppt q-o-q) and 97.5% (-0.1ppt 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 are pre-committed.

Proactive capital management.

• Management has continued with its DPU-accretive unit buyback programme, which is part of its proactive capital management strategy. 13.6m units were purchased and cancelled in 3Q19.

Gearing stable at 38.9% (-0.2ppt yoy).

• We estimate that Keppel REIT’s gearing would reduce by 4.2ppt to 34.7% post-divestment of Bugis Junction Tower for S$547.5m or S$2,200psf in 4Q19. The weighted average term to maturity of its debt has decreased slightly from 3.7 to 3.4 years.
• Its all-in interest rate has improved by 4bp q-o-q to 2.82%. 91% of its debt is fixed-rate borrowings.

Earnings Revision

• We have fine-tuned our 2020-21 DPU forecasts marginally by 1%, factoring in absence of contributions post-divestment of Bugis Junction towers (and redeployment of sale proceeds to pay down debt).

Valuation / Recommendation

• Maintain HOLD with lower target price of S$1.20, based on DDM (required rate of return: 6.0%, terminal growth: 1.5%).

Share Price Catalyst

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

Source: UOB Kay Hian Research - 17 Oct 2019