KEPPEL REIT
K71U.SI
Keppel REIT (KREIT SP) - Expect a Difficult Year
Maintain HOLD. TP cut to SGD0.88.
- High leverage of 43% offers KREIT little room to navigate pitfalls in the office market. While it could issue more perpetual securities without breaching the regulatory limit of 45%, this expensive cost of funds could weigh on its DPU.
- The 4.98% for its recent SGD150m perpetual securities costs much more than its average cost of debt of 2.5%. We expect vacancy to rise as it has large exposure to weakness in the financial sector.
- We see declining DPUs for the next three years.
- Despite the dire outlook, we see the challenges as priced in with KREIT trading at the cheapest valuation among peers.
- We lower FY16-17 DPU by 2% to factor in annual distributions for the recently issued perpetual securities.
- Our TP is cut to SGD0.88 (from SGD0.90), based on unchanged FY16 yield target of 7.25%.
- Prefer CCT among the office REITs.
High leverage limits options
- A key source of pain for KREIT is its high leverage. With 43% aggregate leverage as of 30 Sep 2015, we believe it has limited options to manoeuvre in an onerous office market.
- While issuing more perpetual securities is possible, we see this expensive funding as a drag on distribution. We think a better deleveraging option is the sale of one of its properties, such as Bugis Junction Tower.
- We forecast falling DPUs for the next three years as rising interest rates would further chip away the already weak property income.
Vacancy could rise
- KREIT is highly exposed to weak hiring sentiment in the financial sector, which accounts for 48% of its NLA.
- Not biting although it is the cheapest KREIT is our cheapest office REIT with DPU yields of c.7% vs the low 7% for peers. However, we see little reason to jump in given a difficult office market expected and potential further declines in DPU.
Derrick Heng CFA
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-01-13
Maybank Kim Eng
SGX Stock
Analyst Report
0.88
Down
0.90
