KeppelREIT – DBSV

Riding through the trough

• 4Q14 DPU declines 23% y-o-y upon divestment of Prudential Tower
• Portfolio reversions of 17% supported by strong expansion in tech, media and telecoms (TMT) sector
• Full contribution from MBFC Phase 2 may not mitigate drop in rental support for OFC
• Maintain HOLD, TP S$1.29

Highlights

Results below due to later-than-expected acquisition completion

• Keppel REIT (K-REIT) reported 4Q14 revenue of S$42m (-11% y-o-y) and NPI of S$34m (-8%), largely attributable to lost income stemming from the divestment of Prudential Tower in 3Q14. DPU of 1.51 Scts was 23% lower y-o-y on the back of a dilution in share base post-placement and a delay in the completion of the MBFC Phase 2 acquisition.

Diversification of tenant base to include more from TMT sector

• K-REIT completed c.450k sqft of lease renewals, with average portfolio reversions of17%. This was driven by strong interest from new-to-market as well as relocating companies in the technology, media and telecommunications (TMT) industry. As a result, new leases signed in the Raffles Place/Marina Bay areas averaged S$12 psf pm.

Outlook

Positive rental outlook for 2015

• Close to 420k sqft of leases will be up for renewal or rent review, representing c.13% of portfolio NLA. We understand that the majority of spaces are located in the Raffles Place and Marina Bay areas, where new office space is not expected to be available until FY16. As such, we believe that these leases will continue to see upward reversions of 10-15%.

OFC income support to be fully drawn down by 1Q15

• According to the Manager, income support for Ocean Financial Centre is anticipated to run out by 1Q15, and we estimate that this will have a 6% impact on DPU.
• While full-year contribution from MBFC Phase 2 will more than cover lost income from the divestment of Prudential Tower, we do not expect additional income to cover the shortfall in rental support. As such, we have forecasted FY15 DPU to decline by 7%.

Valuation

Our target price of S$1.29 is based on the discounted cash flow (DCF) model; as K-REIT generates recurring rental income from its tenants. At its current price, K-REIT offers investors a dividend yield of 5.4% for FY15. We have a HOLD recommendation.

Risks

Interest rate risk

• Any increase in interest rate will result in higher interest payments that the REIT has to make annually to service their loans. This reduces the incomeavailable for distribution, which will result in lower distribution per unit (DPU) for unitholders.
  

Currency risk

• As income for S-REITs are distributed in Singapore dollars, any income derived in a foreign currency will have to be exchanged into SGD. As K-REIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in relatively lower contributions from Australia to K-REIT’s total distributable income.
  

Economic risk

• A deterioration of the economic outlook could have a negative impact on office rents, which have a strong historical correlation with GDP growth.