Keppel REIT’s 9M15 DPU met ~73% of our full-year estimate, at 10.5% lower than the year before. Maintain SELL, with a TP of SGD0.86 (14% downside). Its overall portfolio occupancy rate dipped to 98.5%, mainly due to the closure of SCB’s equity business in MBFC Tower 1. We kept our SELL rating, as Keppel REIT is still one of the highest-geared REITs within the sector (42.6%), while it grapples with headwinds in the office rental market.
3Q15/9M15 DPU declines 8.1/10.5% YoY
Keppel REIT’s 9M15 results were in line with our expectation as 9M15 distribution per unit (DPU) declined 10.5% YoY, meeting ~73% of our full-year estimate. The REIT achieved an average 16% positive rental reversion for 9M15 (1H15: 18%). The decline in DPU was mainly attributable to the divestment of Prudential Tower on 26 Sep 2014.
Occupancy dropped mainly due to closure of Standard Chartered Bank’s (SCB) equity business
Recall that SCB announced that it was shutting down its equities business in January. The bank returned the space in Marina Bay Financial Centre (MBFC) Tower 1 to the REIT in the last quarter, which caused its portfolio occupancy rate to dip to 98.5% from 99.3%. We learnt from management that there will not be any further decline in occupancy rates relating to the closure of SCB’s equity business.
Impacted by the weakening AUD
The REIT’s Australian assets with direct rentals registered a negative 9M15 revenue YoY growth of 7.7-8.2% following the weakening of the AUD. Keppel REIT stated that it has hedged almost 100% distributable income from Australia for the remainder of 2015. Its sensitivity analysis stated that its NAV would drop by 2 cents and gearing could rise by 0.3%, should AUD1.00 trade at SGD0.95 (currently AUD1.00 = SGD1.01).
Since we expect further headwinds in the office rental market in the coming years, we remain cautious as 28.4% of its portfolio NLA faces lease expiries in the next two years. We reiterate our SELL recommendation, while our DDM-based SGD0.86 TP remains unchanged. (Read Report)
Read Related Reports
1) Keppel REIT - Challenging Conditions to Continue by Maybank Kim Eng Research, published on 20 October 2015
2) Keppel REIT - Focus on leasing and retention activity by CIMB Research, published on 19 October 2015
3) Keppel REIT - DPU, NPI slightly below estimates by Daiwa Capital Markets, published on 19 October 2015
Source : RHB Research