Asset recycling at top speed

  • Acquired Blue & William, a freehold Grade A office building under development located in North Sydney, Australia for A$327.7m (S$322.2m)
  • Initial NPI yield of 4.5% with three-year rental guarantee; pro forma DPU accretion of c.3%
  • We view this acquisition positively and believe KREIT is setting a new asset recycling paradigm at top speed
  • Maintain BUY; TP of S$1.40.


Investment Thesis:
Best-in-class office portfolio. Keppel REIT’s (KREIT) best-in-class office portfolio, anchored by Singapore Grade A offices in prime central business district (CBD) locations, is well positioned to benefit from a potential recovery in a tight net supply market. Valuation remains attractive at a 0.9x price/net asset value (P/NAV), close to the sector’s historical mean.

The only pure-office REIT. Post the CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) merger, KREIT is the only pure-office real estate investment trust (REIT), a valuable trait that we believe investors have yet to appreciate.

Active asset churn to optimise portfolio drives inorganic growth. KREIT has been very active in churning its assets to optimise and grow its portfolio, which, we believe, will drive inorganic growth.

Valuation:

Our discounted cash flow (DCF)-based target price (TP) of S$1.40 assumes a risk-free rate of 2% and beta of 0.75, and implies a 1.1x P/NAV, which is close to +1 SD (standard deviation) of its historical mean since listing. The stock offers a 5.2% FY22F yield.

Where we differ:

More optimal shareholding structure. KREIT trades at a lower velocity compared to its other large-cap Singapore REITS (S-REITs), which we believe can be addressed if the sponsor considers paring down its stake to a more optimal 30-35% level, similar to other large-cap S-REITs.

Key Risks to Our View:

Slower-than-expected economic recovery and potential new waves of COVID-19. Key risks to our positive view are a prolonged economic downturn and potential second wave of COVID-19 that could impact rents and vacancies.

Risks to capital values. Prolonged weakness in the economy and office market may trigger a decline in capital values.