Maybank Kim Eng Research 2015-07-01 Real Estate Sector (Part 5): Office REITs - BUY Keppel REIT (TP 1.32), HOLD CapitaCommercial Trust (TP $1.77), Suntec REIT (TP $1.89)

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Investment theses – Office REITs

Keppel REIT - BUY (TP $1.32) 

• Underperformance could reverse as fund-raising overhang for acquisition of MBFC Tower 3 is over. 
• Market overly negative on impending expiry of rental support of Ocean Financial Centre. We expect incremental contributions from other units and recently acquired MBFC Tower 3. 
• Highest prospective yields among office REITs. 
• 6.6% contraction in FY15 DPU to 6.8 cts, growth in FY16 to 7.0 cts. 
• Aggregate leverage 42.4%. All-in borrowing cost 2.47%. 
• Valuation: DDM-based TP of SGD1.32 (CoE: 7.7%, LTG: 2.0%). 
• Risks to TP: 
  1. Lower-than-expected office rents 
  2. Dilution from potential fund-raising. 
• Catalysts: 
  1. Sustained increase in office rents. 
  2. Clear communication of no plans for equity fund-raising. 

CapitaCommercial Trust - HOLD (TP $1.77) 

• Incremental contributions from newly-completed 40%-owned CapitaGreen. 
• Low aggregate leverage of 29.9%. Can acquire balance 60% of CapitaGreen without equity-raising. 
• Best lease-expiry profile among office REITs. Smallest exposure to 2016’s supply surge, at 16% of NLA. 
• Positives priced in. Lowest yields among office REITs. 
• 5.8% growth in FY15 DPU at 9.0 cts, a further 8.6% growth in FY16 to 9.7 cts. 
• Aggregate leverage 29.9%. All-in borrowing cost 2.4%. 
• Valuation: DDM-based TP of SGD1.77 (CoE: 7.7%, LTG: 2.0%). 
• Risks to TP: 
  1. Lower-than-expected office rents 
  2. Less-than-full leasing for CapitaGreen. 

Suntec REIT - HOLD (TP $1.89) 

• FY15E DPU to rise 6.2% from phased opening of new retail space. 
• Least favourable lease-expiry profile among office REITs. Large 23.1% of leases due for renewal in 2016. Contracted rates could be lower due to expected softness in office rents. 
• Prefer smaller retail exposure to Downtown Core. 
• Decent 6.2% FY15 DPU growth at 10.0 cts, 3.3% growth in FY16 to 10.3 cts. 
• Aggregate leverage 35.7%. All-in borrowing cost 2.53%. 
• Valuation: DDM-based TP of SGD1.89 (CoE: 7.7%, LTG: 2.0%). 
• Risks to TP: 
  1. Lower-than-expected office rents 
  2. Less-than-full leasing of retail space at Suntec.

(Derrick Heng, CFA; Joshua Tan)

Source: http://www.maybank-ke.com.sg/