SINGAPORE (Apr 19): Keppel REIT (KREIT) on Wednesday announced that its 1Q18 DPU dropped 2.1% to 1.42 cents from 1.45 cents in 1Q17, despite a 0.2% y-o-y increase in income available for distribution to $48.2 million.
Property income n 1Q18 declined 0.3% to $39.7 million mainly due to a 28.9% decrease in other income to $0.69 million.
Net property income (NPI) for 1Q18 came in at $31.2 million, 0.6% lower than $31.4 million in 1Q17.
The variances were mainly attributable to 26.5% lower property income and 31.1% lower net property income from 275 George Street. These were partially offset by higher property income and net property income from Bugis Junction Towers, Ocean Financial Centre and 8 Exhibition Street.
Portfolio occupancy remained fairly stable q-o-q at 99.4%.
See: Keppel REIT posts 2.1% drop in 1Q DPU to 1.42 cents
CIMB is upgrading its recommendation on KREIT to “add” from “hold” previously with an unchanged target price of $1.34.
The trust renewed or leased an attributable 261,400 sq ft of NLA in 1Q18 or about 7% of its portfolio with a high retention rate of 93%.
In Singapore, 84% of total expiries were re-contracted at an average of $10.05 psf or at a positive rental reversion of 3.6%. Two-thirds of the committed leases were review leases while new leases made up another 23.3%.
Meanwhile, KREIT has a remainder 15% of leases due for renewal/review in FY18 and a further FY19, largely in Singapore.
In a Wednesday report, analyst Lock Mun Yee says, “We maintain our expectation of a 15% y-o-y pick-up in spot rents for 2018F, and anticipate further positive rental reversions when these leases are renewed. This should continue to underpin its DPU growth going forward.”
Moreover, the bulk of the REIT’s debts are on fixed-rate terms. Although its gearing is on the higher end at 38.6% as at end 1Q18 of its comparable peers' range, the analyst believes that having 77% of its debt on fixed rates largely mitigates the near-term impact of rising interest rates.
DBS is also reiterating its “buy” recommendation on KREIT with a target price of $1.41.
According to CBRE, CBD Grade A office rents increased 3.2% q-o-q to $9.70 psf/month due to stronger leasing activity from the co-working and technology sectors.
In a Thursday report, analyst Mervin Song reckons that if the sequential improvement in rents continues over the coming quarter, there is risk that spot CBD Grade A rents would exceed his initial estimate of $10 psf/month by end-FY18, presenting an upside risk to DPU estimates and places the REIT in a strong negotiating position for its upcoming renewals and rent reviews
“We believe the strong leasing momentum and rapidly rising spot rents should act as re-rating catalysts for KREIT going forward,” says Song.
Furthermore, should KREIT activate a share buyback after obtaining shareholder approval at its upcoming AGM, this should also send a positive signal to investors and further boost its share price.
On the other hand, Lim & Tan Securities is maintaining its “hold” call on KREIT.
Looking ahead, challenges remain amidst a volatile macro environment and the REIT’s manager will continue to drive stable portfolio performance through ongoing proactive tenant and lease management so as to deliver sustainable distributable income to unitholders.
A prudent capital management strategy will be maintained to optimise the REIT’s performance in a rising interest rate environment.
In a Thursday report, the research house says, “While expectations of the office market upturn has compressed Keppel REIT’s dividend yield to only 4.7%, we note that this is no different from its peer group average, hence we maintain our ‘hold’ recommendation on KREIT.”
Maybank Kim Eng is also maintaining its “hold” recommendation on KREIT with a target price of $1.19.
In a Thursday report, analyst Derrick Heng says, “The first positive reversion in a year has signalled a turning point in the office market, in our view. Nonetheless, we flag vacancy risk at Ocean Financial Centre (OFC) in the year ahead.”
Although KREIT is a good proxy for a rebound in Singapore’s office market, the analyst believes that its narrow trading yield of 5% has already priced in a favourable outlook.
Heng prefers developer landlords, UOL and GuocoLand, for office exposure.
As at 12.31pm, units in KREIT are trading 2 cents higher at $1.22 or 0.85 times FY18 book with a dividend yield of 4.9%.
