• Maintain NEUTRAL; revised Target Price of SGD1.23 from SGD1.20, 2% downside plus 4% yield.
• Keppel REIT’s divestment of Bugis Junction Towers (BJT) is a positive move in our view, considering the asset’s lower yield (low 3%) and minimal rental upside potential with locked in leases.
• Key to watch out for would be how soon management is able to redeploy the proceeds into a good quality higher-yielding asset to offset falling rental income, which could potentially act as a re-rating catalyst.

Divests Bugis Junction Towers at 3% Exit Yield

• KEPPEL REIT (SGX:K71U) announced the divestment of Bugis Junction Towers for SGD547.5m (SGD2,220 psf), a 6% premium to the latest valuation and 243% above its purchase price (2006). Net divestment gains post associated transaction and other costs are SGD18.3m. See Keppel REIT's announcements.
• The divestment at 3% exit yield is a positive one for Keppel REIT, as Bugis Junction Towers has been the lowest yielding asset in Keppel REIT's portfolio (100% occupancy), with minimal near-term rental upside potential due to its long weighted average lease to expiry (WALE) of 6.2 years. The divestment will also strengthen its market positioning with all core CBD assets in Singapore.

Australian Acquisition Likely in the Near Term

• Management noted that for acquisition, its preferred markets are Singapore, Melbourne, Sydney and Seoul. With minimal accretive acquisition opportunities in Singapore and the recent cap rate compression in Seoul, we believe potential near-term acquisitions will likely come from Melbourne and Sydney.
• With Australian CBD cap rates in the low to mid 4% levels and borrowing costs at low 2% levels, we believe Keppel REIT would be able to make accretive acquisitions in that market.
• In the medium to long term, management noted that it expects Singapore to account for about 70% of its portfolio (currently 81%), with overseas markets accounting for the rest.
• Gearing post-divestment and final payment for its under-construction 311 Spencer Street at ~35% presents a debt headroom of SGD500m for acquisitions.

Share Buybacks Likely to Accelerate With More Firepower

• Management noted it will continue to actively pursue its DPU-accretive share buybacks from part of the divestment gain proceeds, as it believes that its share price remains undervalued.
• Since the initiation of the share buyback programme in 3Q18, management has bought back ~60m shares from the open market.

DPU and Target Price Adjustments

• Our FY20F-21F DPU decline 1%, assuming divestment proceeds are used to repay borrowings.
• We have also lowered our CoE by 20bps, factoring in an effective capital recycling strategy, resulting in a higher Target Price.

Source: RHB Invest Research - 2 Oct 2019