Maybank Kim Eng analyst Chua Su Tye has initiated “sell” on Keppel REIT with a target price of 90 cents.
The reason behind Chua’s recommendation is due to the foreseeable headwinds ahead, he says.
The REIT’s distribution per unit (DPU) growth is unexciting compared to its peers as well, Chua adds.
The REIT has emerged as the only pure play office Singapore REIT (S-REIT) with a significant exposure to Singapore Grade-A offices following the merger of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT) in November 2020.
Amid the macro downturn and the new normal of employees working from home (WFH), Chua believes Keppel REIT’s outlook remains challenging given the current uncertainties in office demand.
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We continue to see headwinds for leasing out vacancies and at pressured rents, especially in the coming quarters as firms reassess options post-Covid, and anticipate further downsizing by its financial institution tenants (36% of its net lettable asset or NLA),” he says.
In 3QFY2020, the REIT has seen slow leasing with no progress of the upcoming UBS vacancy, which represents 2% of its total portfolio income.
The REIT’s manager has, however, indicated that it is in the final negotiation stages with potential tenants to fill up that vacancy.
During the quarter, rental reversion at 15% was strong but moderated from +22% in 4QFY2019 and 19% in 1QFY2020 due to low expiring rents.
Weighted average signing rents were higher q-o-q with the signing of smaller spaces, notes Chua.
“We do not expect this to sustain, as rents remain under pressure from upcoming vacancies, exacerbated by demand erosion from WFH arrangements,” he says.
Keppel REIT has also been looking towards rental stability in Australia with the recent acquisitions in the country offering a longer weighted average lease expiry (WALE).
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“311 Spencer Street, completed in July 2020, is fully leased to the State of Victoria for 30 years to serve as headquarters for the Victoria Police. Its recent expansion into Sydney’s Silicon Valley, with the acquisition of Pinnacle Office Park for $306.0 million ($303.3 million) at an initial 5.25% net property income (NPI) yield and a 4.8-year WALE, however sees it competing for similar suburban offices with Ascendas REIT,” notes Chua.
Following the acquisition of Pinnacle Office Park, the REIT’s gearing has risen to 37%. It also issued $300 million perpetual securities at 3.15%, with look-through leverage remaining high at 40% limiting debt headroom, he says.
“Acquisition growth remains challenged by its high trading yield versus tighter office yields, with deals likely to dovetail with its sponsor plan to monetise $3-5 billion in assets, including Keppel Bay Tower and Keppel Towers, which has been earmarked for redevelopment,” he concludes.
As at 4.43pm, units in Keppel REIT are trading 3 cents higher or 2.8% up at $1.11.
