SINGAPORE (Oct 17): Keppel REIT announced its 3Q19 results yesterday and analysts say it will continue to do well.
DBS Group Research has maintained its “buy” call on Keppel REIT with a target price of $1.45. CGS-CIMB also made a similar recommendation but has lowered the target price to $1.35, from $1.41 previously.
Keppel REIT’s 3Q19 numbers recorded a 2.9% increase in its DPU to 1.40 cents, compared to 1.36 cents in 3Q18. This came on the back of a 2.5% y-o-y growth in distributable income to $47.5 million.
Property income for the quarter rose 15.6% to $42.4 million, up from $36.7 million last year. This was led by the maiden full quarter contribution of $4.3 million from newly-acquired T Tower in Seoul.
There was also a higher property income contribution from Singapore’s Ocean Financial Centre, which grew 8.7% to $25.9 million.
See: Keppel REIT posts 2.9% increase in 3Q DPU to 1.40 cents
Keppel REIT’s portfolio committed occupancy was healthy at 98.9% as at end-September. This however fell marginally q-o-q from 99.1% in 2Q19 due to two tenants in MBFC terminating their leases early and committed occupancy at Bugis Junction dropping to 99% in 2Q19.
In Thursday’s report, DBS lead analyst Rachel Tan says, “Despite some expected vacancies at selected properties, we believe downside will be mitigated by strong positive rental reversions with new signing rents in 3Q19 higher than current Grade A core CBD rents of $11.45 psf/month.”
Downplaying concerns of co-working space operators in commercial spaces, management said while there are benefits of having some flexible space in a commercial building, Keppel REIT’s exposure is largely service office.
See: Co-working here to stay, even if WeWork does not work out
Only 0.8% of the REIT’s net lettable area (NLA) is for co-working space operators. After its divestment of Bugis Junction, this exposure will be further reduced to 0.2%.
The REIT will also be divesting Bugis Junction for $547.5 million to unlock value of capital appreciation to optimise its portfolio, while maintaining its exposure to Singapore’s CBD. The divestment is expected to be completed in 4Q19.
It is expected to achieve an asset-level return of 19.4%, driven by $378.1 million of capital gains which the REIT plans to redeploy the funds into higher yielding assets, continue its DPU-accretive unit buyback programme or pare down debt.
In a report released Wednesday, CGS-CIMB analyst Lock Mun Yee says, “We have currently assumed the proceeds are utilised to reduce borrowings as the trust continues to scout for new acquisitions.”
As at noon, units in Keppel REIT are trading at $1.24, or about 0.9 times FY19 book with a dividend yield of 4.66%, according to CGS-CIMB’s estimates.
