SINGAPORE (Apr 23): Despite the slowdown in shopper traffic, retail sales, and “leasing interest” due to the Covid-19 pandemic since February, CGS-CIMB Research is keeping Keppel REIT at “buy” with a revised target price of $1.20 from $1.38 previously.

The target price takes into consideration reduced DPU estimates for FY2020 to FY2022 by 3% to 7.5% to accommodate the “slower leasing environment” and “longer frictional vacancy periods” due to a slower demand for office space. However, it has retained its “buy” recommendation due to a “better-than-projected office rental market and redeployment of divestment proceeds into new accretive acquisitions,” noted CGS-CIMB analysts Lock Mun Yee, and Eing Kar Mei.

This came after the REIT’s trustee-manager announced distribution per unit (DPU) of 1.40 cents for 1Q2020 ended March, which is 0.7% higher than its DPU of 1.39 cents a year ago.

Keppel REIT reported a 3.3% and 3.7% y-o-y decline in 1Q2020 gross revenue and net property income, due to the divestment of Bugis Junction Towers in November 2019, as well as smaller one-off income and lower contributions from 275 George St and 8 Exhibition St.

The quarter’s distributable income of $47.3 million and DPU of 1.4 cents were, however, “relatively stable y-o-y” due to a capital distribution of $5 million, and income from T Tower, which was acquired in May 2019.

CGS-CIMB notes that while there is positive rental reversion in 1Q2020 due to its renewal and leasing of “close to 170,600 square foot space at an average rental uplift of 18.8%”, and that “Keppel REIT still has 8.8% of leases to be renewed and reviewed in FY2020”, momentum will likely slow down from 2Q, from Covid-19.

Relief measures including the passing on of its property tax rebates, full rental waivers in April, as well as allowing its tenants to utilise one month’s worth of security deposits to offset rent payment totalling up to $9.5 million, doesn’t look good for Keppel REIT’s books either.

In a Thursday report, Lock and Eing note that “the COVID-19 situation dampened leasing interest and rental growth momentum but management expects positive reversions to continue, albeit at a narrower gap, due to the low 2020 to 2022 expiring rents of $9.37 to $10.20 per square foot”.

CGS-CIMB takes on a cautiously optimistic outlook to the REIT’s performance this year. The REIT’s committed portfolio occupancy in Singapore stood at a healthy 98.8%, and has two major leases to look forward to in FY2020 – HSBC’s 10-year lease at the Marina Bay Financial Centre (MBFC) in May, and the Victoria Police’s 30-year lease in Melbourne by end 2Q2020.

A robust balance sheet will also help the REIT to tide over this low period. Keppel REIT’s total leverage stood at 36.2% at end 1Q2020. The trust also has reserves to refinance its FY2020 debt maturities, and has close to $966 million available to “meet future obligations”.

As at 1.09pm, Keppel REIT units are trading up 3 cents or 3.03% at $1.02.