Share Price S$1.21
Target Price S$1.46
More Compelling Valuations For The Best Office Portfolio In Singapore
Valuations of KREIT are more compelling as it offers a 40bp premium to the average 6.2% yield for office REITs. Equity overhang from a private placement and Keppel Corp’s distribution in-specie is largely removed. KREIT offers the highest-quality Singapore office portfolio and will benefit from the improving office outlook. Upgrade to BUY (from HOLD) with an unchanged target price of S$1.46.
• Valuations are now more compelling as Keppel REIT (KREIT) offers a yield of 6.6%, 40bp over the average 6.2% yield for office S-REITs. With physical office transactions at 3-3.5% cap rates, office REITs offer better value for investors to gain exposure to economic growth and improvements in office rentals.
• Private placement removes equity overhang. Its recent private placement (completed on 6 August) of 95m new units at S$1.26 per unit raised gross S$120m (S$118m after fees). The proceeds were used to fund the S$192m acquisition of 8 Exhibition Street in Melbourne, Australia, and remove the near-term equity overhang following the recent acquisition.
• Australia office properties still resilient. Mirvac and KREIT recently announced that 8 Chifley Square in Sydney is 70% pre-committed ahead of its completion in Oct 13. This is 14ppt up from Apr 13’s (56% pre-committed) and reflects positive leasing sentiment for high-quality office space despite slowing economic growth due to a moderation in commodity prices. The new tenant, data analytics firm Quantium, joins other tenants including law firm Corrs Chambers Westgarth and insurance leader QBE Insurance Group, at 8 Chifley. Occupancies and pre-commitments for the other Australia properties (275 George Street, 77 King Street and Old Treasury Building) in KREIT’s portfolio are all above 97%.
• Highest-quality Singapore-centric portfolio. About 90% of KREIT’s portfolio by valuation is centred in Singapore, despite recent acquisitions in Australia. Among office REITs, KREIT has the highestquality office portfolio with over 92% of its Singapore portfolio located in the Raffles Place and Marina Bay precincts.
• Divestments by Keppel Corp coming to an end. Following the latest distribution-in-specie of 8 KREIT units for every 100 Keppel Corp shares, we estimate Keppel Corp has pared down its stake to a mere 0.1% (~3.7m shares). Keppel Land remains a substantial shareholder, with a 46% stake in KREIT. Although there could still be some near-term weakness when Keppel Corp’s shareholders receive their KREIT units on 13 September, the previous distribution-in-specie on 8 May marked a 6.8% one-week rally in the share price as new unitholders did not divest of their KREIT units. We view any near-term weakness as a good opportunity to accumulate KREIT.
• We expect Grade-A office rentals to rise 8% yoy in 2014 after bottoming in 2013. Office rentals in 2Q13 remained unchanged qoq at S$9.55psf pm, slowing from the average 3.4% quarterly decline in 2012. We expect office demand to rebound to 2.1m sf p.a. in 2013-17, while demolitions could remove over 60% of upcoming supply over the next two years.
• Acquisition of MBFC Tower 3 by 2014 could be supported by asset sales. As MBFC Tower 3 achieves close to 80% occupancy, and following the positive leasing momentum for OFC, we believe MBFC Tower 3 will be leased by end-13. Any acquisition could be supported through asset divestments, potentially strata-office units in Prudential Tower, as demand for strata-office space remains buoyant. Space at Prudential Tower is valued at S$2,200psf, while strata units at Suntec
City are transacting at S$2,750psf.
• None. Key risks remain the relatively high gearing of 44% post equity und raising and the acquisition of 8 Exhibition Street, although further equity fund raising will likely be paired with acquisitions.
• We upgrade the stock to a BUY (from HOLD) with an unchanged target price of S$1.46, based on dividend discount model (required rate ofreturn: 7.1%, terminal growth: 2.2%).
Share Price Catalyst
• Higher office rentals.
• Positive newsflow on leasing activity, employment and economic growth.
Publish date: 03/09/13