Keppel REIT to benefit from lease renewals, Australia portfolio going forward: UOB

SINGAPORE (Mar 7): UOB Kay Hian is maintaining its “buy” call on Keppel REIT with a target price of $1.35 on expectations of the REIT to benefit from the full-year impact of leases, which were renewed in 2018, this year.

Based on the latest set of FY18 results, the research house likes the REIT for its high tenant retention of 83% and improved average signing rent for Singapore offices leases at $11.10 psf pm versus $9.80 in 2017.

In a Thursday report, analyst John Koh notes that the REIT’s proportion of leases expiring in 2019 was 4.2% of attributable area as of Dec 18, which is much lower than 10.2% in June 2018, in his view.

“Average signing rent was $10.05psf pm in 1Q18 but surged to above $11psf pm in 2Q18-4Q18. This year, KREIT will benefit from full-year impact of leases renewed at higher rents in 2018,” says Koh.

Further, the analyst is positive on K-REIT for its properties in Australia, where he notes the development of 311 Spencer Street is progressing smoothly, with the superstructure for 24 floors already completed.

“The 30-year lease to the Victoria Police will commence when the building is completed in 1H20. The building will provide recurrent income stream with fixed annual rental escalations. It provides NPI yield of 6.4%,” says Koh.

“Occupancy at 275 George Street in Brisbane improved by a significant 5.9ppt q-o-q to 99.3% in 3Q18 as KREIT secured long-term lease from a new government tenant. KREIT will also pursue asset enhancement for 8 Exhibition Street in Melbourne, including upgrading the foyer and lifts in 1H19,” he adds.

Units in Keppel REIT last traded 1 cent lower at $1.27 before the midday trading break, or 0.87 times FY19F book value.