Keppel REIT - Maybank Kim Eng 2016-01-13: Expect a Difficult Year

Keppel REIT - Maybank Kim Eng 2016-01-13: Expect a Difficult Year 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 | http://www.maybank-ke.com.sg/ 2016-01-13
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 0.88 Down 0.90