Keppel REIT - DBS Research 2019-08-05: Sharpening Up Its Portfolio


Keppel REIT - Sharpening Up Its Portfolio

  • Potential sale of Bugis Junction Towers, a positive catalyst as “market value > book value”.
  • Sharpens portfolio; Keppel REIT (SGX:K71U) likely to channel proceeds to other jurisdictions.
  • Near term top-up expected for loss of income but will Keppel REIT share some of the gains?
  • Maintain BUY; Target Price of S$1.45.

What’s New

Angelo Gordon granted due diligence for Bugis Junction Tower.

  • The Business Times reported that Angelo Gordon, a US global alternative investment manager, is doing an exclusive due diligence for Bugis Junction Tower. See report.
  • Market expects pricing to be around S$2,200 psf, with a total price for the property at c.S$547m (~6% premium to its last valuation). This is slightly below the asking price of S$2,300psf when an informal expression of interest exercise was conducted and closed in Sept-18.
  • The price implies a net yield in the low 3%, implying average rentals of around S$7-8psf per month. Given the uptrend in office rents, we expect the property to potentially yield up to 4% if average rents rise to S$10psf.
  • Compared to the most recent Duo Tower transaction sold at S$2,570psf and adjusted for land tenure, Bugis Junction Tower’s pricing is c.6% lower.

Our Views

Sharpens its portfolio, positive for Keppel REIT.

  • In an effort to continue to sharpen its portfolio, we like this potential divestment as we see Bugis Junction Tower as non-core to its otherwise Grade A Singapore portfolio.
  • While located in a location off CBD and in a district that has been seeing multiple transactions over the years (DUO recently sold for S$2,570 psf), we note that GuocoLand Limited (SGX:F17) is building a new massive mixed-use development - Guoco Mid-town, which will complete in 2022.
  • While the remaining land lease tenure is still fairly long at c.70 years, we believe the potential sale of the property should be positive to unitholders as it enables Keppel REIT to recycle the asset towards better yielding assets.
  • The proposed divestment price, while noted to be “below initial expectations” of c.S$2,300 psf, is still positive as it represents a premium to book, justifying our call that Keppel REIT’s fair value is above book value (vs consensus Target Price that prices it below NAV).

Divestment gains for capital distribution

  • We believe that management will use part of the potential divestment gains to support DPU in anticipation of loss of income from the property and to “smooth” out any transitional vacancy in the next 1-2 years.
  • Any potential increase in DPU that is higher than expected is a re-rating catalyst.

Expanding its portfolio overseas.

  • Given that Keppel REIT’s last few acquisitions were largely overseas assets and it recently made a maiden acquisition in Korea, we believe Keppel REIT will continue to look overseas for potential acquisition opportunities to expand its overseas portfolio.

We maintain our BUY rating and Target Price of S$1.45.

  • We remain bullish on Keppel REIT’s prospects as we believe the expected positive rental reversions achieved this year should translate to stronger earnings and DPU ahead.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.45 UP 1.400