Keppel REIT: 1Q15 results were below consensus estimates, as NPI fell 12.4% y/y to $34.6m and DPU fell 13.7% to 1.70c, largely due to the impact of absence of income from Prudential Tower (divested in 3Q14), expiry of income support for Ocean Financial Centre (OFC, expired Jan ’15) and absence of rental support from Marina Bay Financial Centre (MBFC) Phase One.
On a q/q basis, performance fared better, with NPI climbing 1.0% and DPU growing 13%, partly aided by stronger performance from Bugis Junction Towers, as well as larger share of profits from associates, being full-quarter contribution from its one-third stake in MBFC Tower 3.
During the quarter, KREIT managed double-digit positive rental reversion of 19% while maintaining a higher retention rate of 96%. As at quarter end, committed occupancy remained at 99.3%, only MBFC (98.8%) and 77 King Street (92.5%) are not fully occupied.
Meanwhile, a weaker AUD dragged on earnings. Aggregate leverage is rather high at 42.4%, and with 35% of its debt pegged to floating rates, it is remains vulnerable to rising interest rates.
Weighted average cost of debt now stands at 2.47% and debt to maturity is at 3.4 years.
Going forward, analysts are expecting KREIT to take a breather from acquisitions. That means it has to rely on organic rental growth to drive and sustain its DPU, which may not be easy in an environment of large impending supply (in 2016). There are also movements in Grade A office market that is worth watching, with the likes of Microsoft and Google moving from core CBD offices to more economical business parks and Facebook moving to fringe CBD offices.
At the current price, the REIT trades at 0.87x P/B and 5.6% annualized yield, versus its office peers average of 0.92x P/B and 6.4% yield.
The counter has 6 Buy, 12 Holds and 3 Sells on the street, with consensus TP of $1.28