SINGAPORE (Apr 22): The manager of Keppel REIT (KREIT) on Apr 17 announced that its 1Q19 DPU was 2.1% lower y-o-y at 1.39 cents, as distributable income dropped 1.9% y-o-y to $47.3 million.
This decline was mainly due to the impact of occupancy changes, a weaker Australian dollar, and lower income contribution from Ocean Financial Centre following the divestment of a 20% stake in December 2018.
Net property income was marginally higher at $31.3 million from $31.2 million a year ago.
See: Keppel REIT reports 2.1% drop in 1Q DPU to 1.39 cents
Following the results announcement, UOB Kay Hian is reiterating its “buy” call on Keppel REIT with a target price of $1.35.
The REIT’s results were in line with UOB’s expectations. And despite the drop in 1Q DPU, KREIT continues to achieve high overall occupancy of 98.7%, but tenant retention declined to 69% from 83% in 2018.
KREIT has also managed to maintain a positive rental reversion of 14.4%, mainly due to leases signed at MBFC. All the leases concluded during the quarter were from Singapore. Of this, about half were renewals, while the rest were new leases and expansion (mainly from tenants in TMT, banking, financial services and energy sectors).
Meanwhile, UBS will be moving its offices to 9 Penang Road from One Raffles Quay (ORQ) on December 2020.
In an Apr 18 report, lead analyst Jonathan Koh says, “For management, the challenge is to minimise the void period after UBS vacates. When the space is being leased out in 2021, there will likely be three to nine months fit-out period (depending on negotiations).”
Koh estimates about 2% decline in 2021F DPU, assuming a six-month rent-free fit-out period. Regardless, the management remains confident that it can lease out the space and may also see positive rental reversions.
DBS Group Research also continues to rate Keppel REIT “buy” with a target price of $1.38.
According to CBRE, Grade A CBD rents had risen by another 3% q-o-q to $11.15 psf/mth by end-1Q19, and is 25% higher from the low of $8.95 psf/mth in 1H17.
In an Apr 18 report, lead analyst Mervin Song says, “Thus, we believe office rents are on a sustained upturn and the share price rally which started in late 2018 should continue.”
Despite consensus rating KREIT a “hold”, which implies that it should trade at a discount to book value, Song says, with FY18 likely to mark a cyclical low in the REIT’s DPU, he is more forward looking and will focus on growth in DPU from 2019 onwards.
This would be the first y-o-y increase in DPU in more than five years with additional upside from potential deployment of about $500 million debt headroom.
Moreover, the management has been buying back its shares in the past few months, the first S-REIT to do so, sending a strong signal that the stock is significantly undervalued, considering several office buildings in less prime locations have been sold at a cap rate of between 1.7-3.2%, below the 3.60-3.65% used to value KREIT’s best-in-class Grade A buildings in Singapore.
On the other hand, RHB Research is maintaining its “neutral” recommendation on KREIT with a higher target price of $1.12 from $1.06 previously.
The research house notes that its target price is at low end of consensus, as the REIT’s earnings outlook remains weak due to absence of rental support, rental movement at its properties, and divestment of Ocean Financial Centre (OFC), despite strong positive rental reversions of 14%.
Keppel REIT’s gearing has come down to 35.7% with the recent divestment of 20% stake in OFC giving it about $0.5 billion debt headroom for acquisitions (assuming 40% gearing).
In an Apr 18 report, analyst Vijay Natarajan says, “Management noted that it is exploring new markets like South Korea and Japan in addition to its existing markets of Australia and Singapore, but will mainly target Grade-A CBD properties. It also recently issued its maiden $200 million in convertible bonds to boost funding options and lower funding costs.”
As at 12.05pm, units in KREIT are trading at $1.22 or 0.9 times FY19 book value with a distribution yield of 4.5%.
