SINGAPORE (June 8): Despite the recent shift towards working from home, DBS Group Research is maintaining its “buy” call on Keppel REIT (KREIT), but at a lower target price of $1.35.
This is down 10 cents from its previous $1.45 call, in view of the downside risks from the weaker economic outlook, analysts Rachel and Derek Tan say in an 8 June note.
They believe the new target price will give the counter a 16% upside from its $1.16 closing on Friday.
“We believe KREIT’s best-in-class office portfolio anchored by Singapore Grade A offices in prime Central Business District locations is well-positioned to benefit from a potential recovery in a very tight net supply market,” the duo state.
They add that KREIT’s focus on office REITs will be “highly valued by investors”, since it may be the only portfolio with such a composition after the potential CapitaMall Trust and CapitLand Commercial Trust merger.
KREIT’s portfolio comprises nine office assets located in the CBD districts of Singapore, Seoul, South Korea and the Australian cities of Sydney, Melbourne, Brisbane and Perth.
Its assets in Singapore include: a 79.9% interest in Ocean Financial Centre at Raffles Place, a one third interest in One Raffles Quay and a one third interest in Marina Bay Financial Centre (comprising Towers 1,2 and 3 and the Marina Bay Link Mall).
In South Korea, it has a 99.38% stake in T Tower, a 28-storey building at the heart of Seoul’s CBD.
Down Under, KREIT holds 50% stakes in properties such as in 8 Chifley Square in Sydney, 275 George Street in Brisbane, David Malcolm Justice Centre in Perth and in an office tower under development at 311 Spencer Street in Melbourne. It also holds a 50% stake at 8 Exhibition Street in Melbourne as well as a 100% hold on three adjacent retail units.
Across these facilities, both analysts say KREIT’s portfolio occupancy has edged down 0.2 percentage points on a quarterly basis to a healthy 98.9%.
Lower occupancies were recorded at Ocean Financial Centre which dipped 0.4 percentage points q-o-q, 8 Exhibition Street (-1.8 percentage points) and 275 George Street (-1.5 percentage points).
“We understand that the lower occupancies in 8 Exhibition Street and 275 George Street were due to non-renewals,” the analysts note, adding that negotiations are ongoing so more updates will be seen in the next quarter.
The average price of KREIT’s rents stood at $12.16 per square foot/month in 1Q20. While down 2% from its peak in 4Q19, it remains above the market average for Grade A core CBD facilities. This translated to an 18.8% positive rental reversion in 1Q20.
Overall, KREIT reported a distributable income of $47.3 million for 1Q20, giving it a distribution per unit (DPU) of 1.40 cents. This is some 0.7% higher than the DPU of 1.39 cents posted a year ago.
KREIT has since extended $9.5 million in tenant support measures, of which $8.2 million are estimated property tax rebates to be received from the Singapore government. These rebates will be disbursed in full to its office and retail tenants.
It has also extended a full rental waiver to its eligible retail tenants in April, through the usage of a month’s security deposit. Retail tenants comprise 1.8% of its portfolio.
As for office tenants, KREIT estimates that high-risk tenants - comprising 4.5% of its portfolio – may request for rental rebates or deferment. These profiles come from the hard-hit sectors of tourism-related technology, co-working and serviced offices, gyms, medical clinics and hospitality-related trade mix.
A recent bill passed in Singapore’s Parliament to pass struggling small and medium-sized enterprise (SME) tenants with rental waivers of up to two months, is believed to have minimal impact on KREIT. This is since its portfolio mix comprises prime assets and has minimal SME tenants, the Tans elaborate.
A similar bill issued in Australia is also believed to have minimal impact on KREIT, for it estimates SME tenants there to account for less than 5% of its occupant mix.
Overall, the analysts estimate the Covid-19 health-turned-economic crisis could impact less than 5% of KREIT’s income.
“Despite some pressure on office rental rates, management expects to continue delivering high positive single-digit to low-double-digit rental reversions with the buffer from low expiring rents ranging from $9.37 in FY20 to $10.20 in FY22,” they observe.
They note possible challenges to come from vacancies and non-renewals taking longer to backfill. Heightened downsizing risks from expiring leases and rent reviews – which contribute to 23% of gross rents – further weighs down KREIT.
As at 11.27am, shares of Keppel REIT were up a cent or 0.86% to $1.17.
