Keppel REIT

Keppel REIT: (S$0.90) Decent 4Q15 results but larger headwinds loom
Keppel REIT’s 4Q15 results met estimates as DPU climbed 11.3% y/y to 1.68¢, on a 17.8% jump in distributable income to $54m, which included a $5m residual gain from divestment of Prudential Tower as well as higher contributions from associates and JVs.

Revenue and NPI edged up 1.1% and 1.5% to $42.8m and $34.8m, respectively, on higher property income from Ocean Financial Centre (+4.5%) and Bugis Junction Towers (+8.2%).

This was partially offset by the absence of income from the divested Prudential Tower as well as poorer performances from 275 George Street (-8.6%), 8 Exhibition Street (-6.7%) and recently divested 77 King Street (-14%).

Share of income from associates and JVs grew 8.8% to $22m on full quarter contributions from MBFC Tower 3 (30% stake) and Old Treasury Building (50% owned) in Perth.

Portfolio occupancy stood at 99.3% (+0.8ppt q/q) with weighted average lease expiry of six years. Notably, the office REIT managed to renew 480,000 sf of leases during the quarter (FY15: 1.6m sf), while rental reversions moderated to under 5% for its Singapore assets (FY15: +13%).

Despite challenging leasing market, an estimated 80% of the signings were new to KREIT/Singapore, with a healthy demand coming from the firms in the TMT sector, such as Netflix. It is already negotiating with tenants for the 17% of leases expiring this year, and is hopeful of a high retention rate.

Balance sheet has been strengthened with aggregate leverage lowered to 39.3% (-3.3ppt) following the repayment of borrowings using proceeds from the issuance of its $150m perpetual securities as well as the 64.4% revaluation of its portfolio.

The quarter saw KREIT divesting 77 King Street (Sydney) for A$160m, with expected book gain of A$28m. Maybank-KE envisages future non-core distributions to include about $60m, spread over four years, thereby lifting its DPU expectations by 3-5% till FY18.

Moving forward, the REIT intends to intensify its tenant retention and engagement efforts to support occupancy and rental rates especially in the face of a wave of office space supply coming online over the next two years. Approximately 25% of its net lettable area will be up for renewal in 2016/17.

At currently prices, KREIT is trading at an annualised DPU yield of 7.5% (FY15 DPU: 6.8¢) and 0.63x P/B.

Latest broker ratings:
RHB upgrades to Neutral with TP of $0.83
Maybank-KE maintains Hold with TP of $0.88
Credit Suisse maintains Neutral but cuts TP to $0.95 from $1.11
Deutsche maintains Hold with TP of $1.00
CIMB maintains Add but cuts TP to $1.08 from $1.15
Goldman Sachs maintains Neutral but cuts TP to $1.09 from $1.12
UOB Kay Hian maintains Buy with TP of $1.22