SINGAPORE (Jan 24): The manager of Keppel REIT (KREIT) on Tuesday posted a distribution per unit (DPU) of 1.43 cents for 4Q17, 3.5% lower than 1.48 cents in 4Q16.
This brings the REIT's FY17 DPU to 5.7 cents, 10.5% lower than 6.37 cents last year.
The drop in DPU came despite the REIT recording a 15.3% increase in net property income to $36.2 million from $31.4 million a year ago.
See: Keppel REIT posts 3.4% decline in 4Q DPU to 1.43 cents
DBS is maintaining its “buy” call on KREIT with a higher target price of $1.41.
In a Wednesday report, analyst Mervin Song says, “KREIT’s share price typically leads a recovery in spot office rents by 6-12 months.”
Furthermore, CBRE says that Grade A CBD rents rose 4% q-o-q to $9.40 psf per month in 4Q17, following the first increase in 10 quarters in 3Q17.
Hence, the analyst believes that this is a cusp of an upturn and the rally in KREIT’s share price can be sustained despite gaining more than 30% over the past 18 months.
KREIT will be prioritising its cash to fund equity contribution for the 311 Spencer Street development rather than temper near term earnings pressure.
According to Song, consensus are likely to remain cautious and reiterate their “hold” rating despite the rally over the past year due to the REIT’s fall in FY18 DPU.
“However, with FY18 marking the cyclical low in KREIT’s DPU, we believe the market will be more forward looking and focus on the projected growth in DPU from 2019 onwards which would be the first y-o-y increase in DPU for over five years,” says Song.
In addition, some investors have been critical of KREIT as its DPU was supplemented with capital distributions. But with a clean yield going forward, the negative perception should no longer impede KREIT’s share price performance.
Separately, CIMB continues to rate KREIT “hold” with a target price of $1.34, on the back of an expected total return of 6%.
Looking ahead, KREIT has 22.5% of portfolio NLA due to be renewed/reviewed in FY18 and a further 12% in FY19.
Most of the FY18 expires are from its Singapore portfolio and due to be re-contracted later this year.
In a Tuesday report, analyst Lock Mun Yee says, “Given the pick-up in office rents, amid broader-based economic growth, we believe the gap between expiring rents and renewal rents is likely to narrow or turn positive. This should underpin KREIT’s DPU growth.”
RHB however is downgrading its recommendation on KREIT to “sell” from “neutral” previously with a slightly increased target price of $1.06, as the research house believes that it is fully valued.
According to analyst Vijay Natarajan in a Wednesday report, negative rent reversions are likely to persist in 1H18 despite a pickup in the office market, as expiring rents were signed closer to the previous peak in 2014.
Meanwhile, contributions from the REIT’s 311 Spencer Street is likely to only start in 2020, while progress payments via debt would increase interest expense slightly.
KREIT currently has $11.5 million remaining in terms of rental support income, which would end by 2019 and for FY17, the REIT distributed $12.8 million. For this year, the analyst expects it to be lower by 33%.
“With gearing close to 40%, we do not rule out the possibility of equity fund raising,” says Natarajan.
As at 12.00pm, units in KREIT are trading 3 cents lower at $1.29 or 0.95 times FY18 book with a dividend yield of 4.36%.
