Keppel REIT

UOBKayhian on 3 Sept 2013

Valuations are now more compelling as Keppel REIT (KREIT) offers a yield of 6.6%, a 40bp over the average 6.2% yield for office S-REITs. With physical office transactions at 3-3.5% cap rates, office REITs offer better value for investors to gain exposure to economic growth and improvements in office rentals.

Private placement removes equity overhang. Its recent private  placement (completed on 6 August) of 95m new units at S$1.26 per unit raised gross S$120m (S$118m after fees). The proceeds were used to fund the S$192m acquisition of 8 Exhibition Street in Melbourne, Australia, and remove the near-term equity overhang following the recent acquisition. Australia office properties still resilient. Mirvac and KREIT recently announced that 8 Chifley Square in Sydney is 70% pre-committed ahead of its completion in Oct 13. This is 14ppt up from Apr 13’s (56% precommitted) and reflects positive leasing sentiment for high-quality office space despite a slowing economic growth due to a moderation in commodity prices. The new tenant, Quantium, a data analytics firm, joins other tenants including law firm Corrs Chambers Westgarth and insurance leader QBE Insurance Group at 8 Chifley. Occupancies and precommitments for its other Australia properties (275 George Street, 77 King Street and Old Treasury Building) in KREIT’s portfolio are all above 97%. We upgrade the stock to a BUY (from HOLD) with an unchanged target price of S$1.46, based on dividend discount model required rate of return: 7.1%, terminal growth: 2.2%).