SINGAPORE (July 18): Deutsche Bank earlier this month announced it was axeing 18,000 jobs globally in one of the biggest overhauls to an investment bank since the aftermath of the financial crisis.

The bank also outlined a restructuring plan that will ultimately cost €7.4 billion ($11.3 billion) and see it scale back its investment bank, scrap its global equities business and also cut some of its fixed-income operations.

The news must have been equally depressing for the manager of Keppel REIT as the bank occupies about 20,000 sf at One Raffles Quay (ORQ).

Under its current lease term which extends until 2025 and has a no-break clause, Keppel REIT says Deutsche will not be able to return to the office space, but may sub-lease some of its existing space.

To complicate matters, another tenant of ORQ, Swiss investment bank UBS will also be moving its offices to 9 Penang Road in Dec 2020.

And although the REIT expects the space to see strong demand after UBS vacates, there is likely to be an earnings void of up to six months during the transition period.

Separately, Keppel REIT in 2Q19 reported a 2.1% fall in its DPU to 1.39 cents from 1.42 cents in 2Q18, which came on the back of a 2.1% y-o-y drop in the REIT’s income available for distribution to unitholders to $47.3 million.

See: Keppel REIT posts 2.1% drop in 2Q DPU to 1.39 cents

Net property income for 2Q19 dropped 28.1% to $31.1 million after property income fell 22.7% y-o-y to $39.9 million and property expenses increased 4.8% to $8.9 million.

The lower property income and net property income was mainly due to lower one-off income from Ocean Financial Centre and lower contribution from Bugis Junction Towers. While the operating performance of 275 George Street in Brisbane improved year-on-year, a weaker AUD led to the decrease in contribution of this property.

However, this was partially offset by income contribution from the REIT’s newly acquired T Tower in Seoul and higher net property income from 8 Exhibition Street.

See: Keppel REIT breaks into Seoul market with $301 mil office tower purchase

Given its lacklustre 2Q results and with tenants shifting out, it's not surprising analysts are keeping a neutral stance on Keppel REIT.

Jefferies has downgraded Keppel REIT to “hold” from “buy” but with a higher target price of $1.30.

“While we like the portfolio, we downgrade Keppel REIT to ‘hold’ as we expect higher shadow space, slower rent reversions and relatively full valuation,” says analyst Krishna Guha in a Wednesday report.

As at June 30, cash and cash equivalents stood at $98.7 million while assets under management (AUM) stood at $8.4 million, comprising interests in 10 premium office assets located in Singapore, Australia and South Korea.

Portfolio committed occupancy was also a high 99.1%.

Meanwhile, RHB Research is maintaining the REIT at “neutral” with a higher target price of $1.20.

“With average expiring rents for 2H19/2H20/2H21 expiring leases being at $10.70/$9.70/$9.60 psf (10-20% below current signing rates), we see good room for rental growth ahead. This, in our view, should help offset the absence of rental income support (about $8.6 million for 2018) which were fully utilised by 1Q19,” says analyst Vijay Natarajan in a Tuesday report.

In 1H19, 272,900 sf of leases were signed by the manager of Keppel REIT, with rental reversions coming in at 15%.

By May 2020, Marina Bay Financial Centre (MBFC) will also get a new banking tenant in the form of HSBC which will start fitting-out its office in 4Q19.

As at 2.50pm, units in Keppel REIT are trading at $1.29 or 0.9 times FY19F book with a dividend yield of 4.4%.