Analyst briefings: Keppel REIT second-quarter earnings

Keppel REIT’s Ocean Financial Centre. Source: Keppel REITKeppel REIT’s Ocean Financial Centre. Source: the company

Keppel REIT reported Monday its second quarter net property income dropped 28.1 percent on-year to S$31.06 million amid the divestment of a 20 percent stake in Ocean Financial Centre and the early surrender of leases.

The distribution per unit (DPU) was 1.39 Singapore cents for the quarter, down 2.1 percent from 1.42 Singapore cents in the year-ago quarter, the REIT said.

UOB KayHian

UOB KayHian said the second quarter DPU was in line with its expectations, calling it a “decent performance,” despite a high base in the year-ago period, when it had a one-off gain of S$12 million from the early termination of leases.

Looking forward, the brokerage said it expected Keppel REIT would continue to have positive rental reversions for its Singapore portfolio. UOB KayHian pointed to leases totaling 272,900 square feet being completed in the first half.

“Most leases concluded were in Singapore where the average signing rent was $11.93 per square foot per month, above market average for Grade A office space in core central business district,” the brokerage said in a note Tuesday, adding that CBRE data show Singapore’s average Grade A office rents were S$11.30 per square foot per month.

That compared with management’s disclosure that the average rents for expiring leases are S$10.70 per square foot for 2019, S$9.70 per square foot for 2020 and S$9.60 per square foot for 2021, the note said.

UOB KayHian also noted the 311 Spencer property would begin to contribute in the first half of 2020, when it’s completed.

It kept a Buy call with a target price of S$1.37.

RHB

RHB said Keppel REIT’s second-quarter results were in line with its expectations, but pointed to some headwinds ahead.

“Key positives ahead are strong rental growth potential and acquisition contributions, offset by downtime from tenant movements and absence of rental support,” RHB said in a note Tuesday.

With average expiring rents for leases ending in the second half of 2019-2021 around 10-20 percent below current signing rates, “we see good room for rental growth ahead,” RHB said. But it noted the REIT had around S$8.6 million of rental support in 2018, and it was fully utilized by the first quarter of this year.

RHB also noted that the REIT would face “downtime” as UBS will be vacating around 230,000 square feet of space at One Raffles Quay at the end of 2020, which would likely leave an “earnings void of around three to six months during the transition period.

Deutsche Bank, which has been undergoing major restructuring in Asia Pacific, also occupies around 200,000 square feet at One Raffles Quay, but management noted that under the current lease, the German bank can’t return the space until 2025, but it may sublease it, the note said.

In addition, HSBC is only expected to move into Marina Bay Financial Centre in May 2020, RHB said.

RHB kept a Neutral call on Keppel REIT, but raised its target price to S$1.20 from S$1.12 on expectations of a lower cost of equity amid a prolonged low interest rate environment.

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CGS-CIMB

CGC-CIMB said Keppel REIT’s first half DPU of 2.78 Singapore cents came in at 47.5 percent of its full-year forecast, marking the lower end of the brokerage’s expectations.

It noted some concerns while still pointing to positive rental reversions.

“In terms of the leasing environment, whilst the office rental upcycle remains intact, the upward momentum has slowed a little,” the brokerage said in a note Monday.

Keppel REIT still has 2.1 percent and 12.5 percent of gross rental income to be renewed or reviewed for the rest of 2019 and for 2020, respectively, CGS-CIMB noted, adding expiring rents for 2019-2021 range from S$9.60 to S$10.70 per square foot, lower than current signing rents.

“We anticipate the positive rental reversion trend to continue,” the brokerage said.

The brokerage left its forecasts for One Raffles Quay unchanged, noting that Deutsche Bank has an existing long lease at the property and takes up around 16 percent of the space there.

The brokerage kept an Add call with an unchanged target price of S$1.41.

Daiwa

Daiwa said Keppel REIT’s results came in in line with its forecasts, but that was due to an earlier-than-expected contribution from the acquisition of T Tower in South Korea.

T Tower contributed S$1.6 million in revenue and S$1.3 million in net property income in the second quarter, Daiwa said in a note Monday, adding it hadn’t expected the inclusion until the third quarter.

That contribution was offset by a decline in income from Bugis Junction Towers on an on-quarter basis, missing the investment bank’s forecast after the departure of Keppel Land and Keppel Capital, Daiwa said.

In a separate note on Tuesday, Daiwa noted the DPU included a capital gain distribution of S$3 million, unchanged from the first quarter.

“Management said that it had S$105 million left for ‘capital top-ups’ and indicated that they could be used to temporarily offset the rental void periods during major tenant transitions,” Daiwa said Tuesday.

The investment bank nudged up its target price to S$1.05 from S$1.04 after raising its 2020-21 DPU forecasts by 0.2 percent.

But it kept an Underperform call on Keppel REIT, saying it viewed the REIT’s “near-industry-low DPU yields” as unattractive.

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