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Analysts: KREIT To Bounce Back, Buy Now For 8% Upside
Aspire, Hot Picks | 27 April 2015
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By: Raymond Leung
Articles (142) Profile

Analysts' updates on Keppel REIT as at 26/04/2015

The REIT sector has been worried about the impending raised interest rates for months. Singapore’s office REITs have faced the most difficulties as most investors are afraid of reduced earnings.

Keppel REIT’s (KREIT) latest earnings report have resolved investor fears and gave analysts a good reason to reevaluate the counter. Analysts from DBS Vickers Research stated that KREIT’s decreasing earnings will reverse back up very soon. This is the time for investors to buy into the trust.

KREIT’s Earnings Trailed Off

Source: Keppel REIT Income Statement, Bloomberg

Net Property Income (NPI) for KREIT fell by 9.36 percent to $42.4 million and brought its Distribution Per Unit (DPU) along with it as they fell by 13.7 percent. This resulted in the lower distribution yield of 5.7 percent instead of its historical 5.9 percent.

The sharp fall in DPU was caused by a larger shareholder base post-acquisition of Marina Bay Financial Centre (MBFC) Tower 3 and lower NPI. Absence of contribution from Prudential Tower and rental support from MBFC Tower 1 were main causes of the lower NPI for KREIT.

KREIT To Bounce Back

Operational performance of KREIT have been reassured in 1Q15 as the portfolio occupancy remained high at 99.3 percent. It had also seen a 19 percent positive rental reversion rate for lease reviews in 1Q15.

The only downside to its performance is the possibility of a final drawdown of rental support from Ocean Financial Centre, at an estimated cost of $2.4 million.

For 2015, analysts estimate that ten to 15 percent of KREIT’s leases will expire and can then be marketed at a higher rent. They have since raised KREIT’s DPU forecast by two percent after considering the high possibility of positive rental reversions.

KREIT’s Attractive Properties Range

Even when the supply of office space in Singapore is expected to glut in 2016 to 2017, analysts remain confident towards the portfolio of KREIT. This is due to the high quality of properties that KREIT owns, which comprises some of the most sought after properties in Singapore.

KREIT’s investment into the Australian market will provide the trust with diversification into another market with stable rental base. This is essentially because of the ten-year leases signed. Furthermore, these Australian leases contain annual rental escalations that will provide income growth for KREIT.

Analysts’ Thoughts

Analysts from DBS Vickers Research upgraded KREIT to “Buy” and increased the target price to $1.32. They believe that the fear of DPU falling has been included in the current price and it is time for the counter to catch up with the other S-REITs. Based on the current price of $1.32, the potential upside of KREIT is 8.64 percent.

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.

Keppel REIT  1.240 -- --   
Business: Real Estate Invs Trust. Invs in a portfolio of quality real estate and real estate related assets.

Insight: Jul-19, 1H19 property income declined 12.5% mainly... Read More

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