Keppel REIT - UOB Kay Hian 2021-08-12: Potential Enlargement Of Scope & Scale Through Consolidation (with SPH REIT)


Keppel REIT - Potential Enlargement Of Scope & Scale Through Consolidation

  • Keppel Corporation’s proposed privatisation of SPH could lead to Keppel REIT’s potential acquisition/merger with SPH REIT. SPH’s Seletar Mall and The Woodleigh Mall could form part of Keppel REIT’s future sponsor pipeline. A thorough review of feasibility is underway.
  • Keppel REIT has broadened its footprint to CBD fringe and is open to acquiring business park properties, including those at one-north in Singapore and Parramatta in Sydney, Australia. Maintain BUY. Target price: S$1.49.

M&A activities to drive industry consolidation for S-REITs.

  • Keppel Corporation (SGX:BN4)’s proposed privatisation of Singapore Press Holdings (SPH, SGX:T39) via a scheme of arrangement will have a profound impact on Keppel REIT (SGX:K71U) and SPH REIT (SGX:SK6U). The privatisation would increase the AUM of the integrated asset management platform under Keppel Capital by 27% to S$47b. The two S-REITs would become sister S-REITs.
  • Within current mandate to acquire retail properties. Keppel REIT invests in commercial real estate, which encompasses office, retail and mixed developments. Keppel REIT could potentially acquire or merge with SPH REIT, which owns Paragon (an upscale retail mall with medical suites), The Clementi Mall and The Rail Mall in Singapore, and Figtree Grove at Wollongong and Westfield Marion at Adelaide in Australia. Keppel REIT could also acquire SPH’s Seletar Mall and The Woodleigh Mall (under construction), which could form part of its future sponsor pipeline. Hospitality assets, such as purpose-built student accommodation (PBSA), are a different asset class. Keppel REIT is unlikely to dabble with SPH’s PBSA properties.
  • Acquisition/merger likely to be yield accretive. The potential acquisition/merger with SPH REIT is expected to be yield accretive. Keppel REIT is currently trading at 2022F distribution yield of 5.5%, compared with SPH REIT’s 5.8%. Management will conduct a thorough review on the feasibility of the potential acquisition/merger.

Confusion caused a steep drop in Keppel REIT's share price.

  • The ex-date for Keppel REIT’s interim dividend of S$0.0294 for 1H21 was 3 Aug 21, which happened to be the day Keppel REIT resumed trading after a trading halt was imposed due to the announcement of the privatisation offer for SPH. The steep drop in unit price caused confusion and could have exacerbated the selling pressure. Keppel Corporation’s stake in Keppel REIT would be reduced from 46% to 20% due to the scheme of arrangement. The resultant increase in free float could lead to a higher index weightage on FTSE EPRA Nareit Global Developed Index.

Broadening of footprint to CBD fringe and business parks.

  • Keppel REIT will focus on office properties in Singapore and Australia (Sydney and Melbourne) for acquisitions. Its primary focus is Grade-A office space within the CBD. Management is also on the lookout for offices at CBD fringe and decentralised locations, which complements its footprint within the CBD.
  • Keppel REIT’s two latest acquisitions, which are Pinnacle Office Park in Sydney, Australia and Keppel Bay Tower in HarbourFront, Singapore are located at CBD fringe. Keppel REIT is open to acquiring business park properties, including those located at one-north business park in Singapore and Parramatta in Sydney, Australia.

The road back to the office.

  • As of 9 Aug 21, 66.6% of Singapore’s population had been fully vaccinated against COVID-19 and another 8.1% of population has received one dose of the COVID-19 vaccine. Up to 50% of employees will be allowed to return to work at their workplace starting 19 Aug 21. Social gatherings at the workplace will also be allowed. 80% of Singapore’s population is expected to be fully vaccinated by September. Achieving the important milestone could pave the way for social distancing measures to be further eased and potentially more employees allowed back at the office in 4Q21.

Grade-A offices within core CBD benefitting from flight to quality.

  • According to CBRE, some landlords have started to push for higher rents for better-performing buildings. Rents for Grade-A office space within core CBD increased 1% q-o-q to S$10.50psf/month in 2Q21, the first increase since 4Q19. Vacancy rates for Grade-A core CBD remain low at 4.4%. The Grade-B market continues to struggle to backfill vacant space. Rents for Grade-B islandwide have dropped 0.7% q-o-q to S$7.15psf/month. Chinese technology giants that are expanding in Singapore include Tencent and ByteDance. Hedge fund Citadel and investment management company Hamilton Lane have also recently set up their offices in Singapore.

Office leasing momentum could pick up again in 4Q21.

  • Office rents are likely to have bottomed in Singapore. Physical occupancies at Keppel REIT’s office buildings have been creeping up gradually and steadily. We expect Keppel REIT to maintain positive rental reversion because average expiring rents are low at S$10.03psf in 2H21 and S$10.26psf in 2022.

Keppel REIT - Valuation & Recommendation

Keppel REIT - Share Price Catalysts

  • Positive rental reversion for office properties in Singapore.
  • Full-year contributions from Victoria Police Centre (311 Spencer Street) in Melbourne and ffice Park in Sydney in 2021.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.490 SAME 1.490