SINGAPORE (Jan 25): RHB Research is downgrading Keppel REIT to “sell”, from “neutral” previously, on the back of negative rent reversions that are likely to persist for K-REIT.
This comes despite a pickup in the office market, says analyst Vijay Natarajan, as K-REIT’s expiring rents were signed closer to the previous peak in 2014.
According to Natarajan, K-REIT signed 26 leases with net lettable area (NLA) totalling approximately 297,300 sq ft in 4Q17, at an estimated rent reversion of -6%. This was steeper than the estimated rent reversion of -4% in FY17.
In 2018, about 22.5% of K-REIT’s portfolio NLA is due for renewal and review, with the bulk of it coming in 2H18.
“As the expiring rents in 2018 were signed closer to office market peak in 2013/2014, we believe spot rents are still 5-10% lower than expiring rents,” says Natarajan. “Thus, we expect negative rent reversions to persist for the next two quarters before flattening out in 2H18.”
At the same time, K-REIT is expected to see its gearing rise to close to 40% as a result of its acquisition of a 50% stake in a premium office tower to be developed at 311 Spencer Street in Melbourne, Australia.
Payment for the A$347.8 million ($362.4 million) acquisition will be done via a combination of debt and cash.
With its gearing creeping closer to the maximum allowable gearing limit of 45%, Natarajan says the limited debt headroom would also reduce potential yield-accretive acquisitions.
In addition, Natarajan points to the tapering off of K-REIT’s rental support. “K-REIT has $11.5 million remaining in terms of rental support income, which would end by 2019,” he says.
The REIT distributed some $12.8 million in rental support income for FY17, 23.4% lower than a year ago. And Natarajan forecasts that this could fall by another 33% for FY18.
Taking into account lower rental support and higher interest expense, Natarajan is lowering his distribution per unit (DPU) forecasts for FY18-19 by 3-5%.
K-REIT in 4Q17 posted DPU of 1.43 cents, 3.4% lower than the corresponding quarter a year ago.
This brings K-REIT’s FY17 DPU to 5.70 cents, down 10.5% from DPU of 6.37 cents a year ago.
See: Keppel REIT posts 3.4% decline in 4Q DPU to 1.43 cents
As at 12.24pm, units of K-REIT are trading 2 cents lower at $1.28, representing an estimated price-to-earnings ratio of 16.1 times, a price-to book ratio of 0.9 times, and a dividend yield of 4.2% for FY18.
