Keppel REIT - DBS Research 2016-10-19: Money left on the table

Keppel REIT - DBS Research 2016-10-19: Money left on the table KEPPEL REIT K71U.SI

Keppel REIT - Money left on the table

  • 3Q16 DPU of 1.60 Scts (-6% y-o-y) in line due to earlier disposal of 77 King Street.
  • Only 5% of expiring leases in each of 2017 and 2018 to be renewed with positive rental reversions achieved in 3Q16.
  • Trimmed FY16-17F DPU by 2% each on higher share base and drag from Bugis Junction Towers.

Recent rally to continue. 

  • Keppel REIT (KREIT)’s share price has rallied over 25% since its lows in late January. KREIT’s valuation is still attractive on the basis of its cheap valuation on a per square foot (sqft) basis and decent 5.8% yield. 
  • In addition, through proactive lease renewals, KREIT has derisked its portfolio to mitigate against potential downside from occupancies and rental rates. Thus, we maintain our BUY call with a revised TP of S$1.23.

Tenancy risk in 2017 and 2018 significantly reduced. 

  • The impact on DPU from the potential loss of key tenants in 2017 and 2018 has been reduced considerably. With forward renewal efforts year-to-date, there are only 5% of leases left for renewal in each of 2017 and 2018 with no further leases due for the remainder of 2016. 
  • While expiring rents over the next two years are in the low S$9 level, close to current Grade A rents of S$9.30, we believe premium status of KREIT’s properties will help mitigate the potential decline in overall office rents.
  • Furthermore, with S$50-60m of disposal gains yet to be distributed, KREIT has the flexibility to stabilise its DPU going forward.

Compelling valuations on per sqft valuation basis. 

  • KREIT’s Singapore Grade A office portfolio is trading at an implied value of c.S$2,400 per sqft compared to recent office market transactions including the sale of Asia Square Tower 1, 60% interest in CapitaGreen and Straits Trading Building at between S$2,700 (adjusted for 99-year leasehold for CapitaGreen) to S$3,500 psf. 
  • With abundant liquidity as well as long term investors being positive on the Singapore office market and looking beyond short term supply headwinds, we believe capital values for office properties will remain resilient near term and KREIT’s discount to the physical market is unwarranted.


  • After incorporating higher number of shares on issue and near term drag from loss of California Fitness at Bugis Junction Towers, we trim our DCF-based TP to S$1.23 from S$1.26.
  • Our TP implies a valuation of c.S$2,500 per sqft for KREIT’s Grade A offices in Singapore.

Key Risks to Our View

  • A key risk to our view is new offices supply causing spot rents to fall below S$7 per sqft, which will likely lead to lower asking rents, coming in below our expectations.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-10-19
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.23 Same 1.260