Nomura downgraded Keppel REIT to Neutral from Buy, despite a potential gain from a possible sale of Bugis Junction Towers, saying the positives were priced in for now.
“We believe the improving earnings profile over the next three to five years as well as the potential benefits from a sale of BJT (or other
assets) are likely priced in the current valuation,” Nomura said in a note on Thursday.
It noted that Keppel REIT trades at a yield spread of only 2.3 percentage points.
It cut its target price to S$1.20 from S$1.31 after rolling over its valuation to 2019 and cutting its 2019 distribution per unit (DPU) forecast by 6.4 percent on lower distributions from joint ventures.
The brokerage reiterated that divesting Bugis Junction Towers would be a positive for the REIT.
Bloomberg reported earlier this month that Keppel REIT had put Bugis Junction Towers, which is around 6 percent of the REIT’s portfolio value, up for sale, Nomura had noted in an earlier research report.
The investment bank estimated Keppel REIT would book an around S$60 million divestment gain, or 2 Singapore cents per unit, if BJT was sold at a 2.7 percent exit yield, or around S$2,400 a square foot, which would be 12 percent above its latest book valuation.
The potential sale would also “significantly” deleverage Keppel REIT’s balance sheet, while the impact to distribution per unit (DPU) would likely be minimal at less than 1 percent, Nomura said.
It estimated aggregate leverage would fall to 35 percent in 2019 on a BJT divestment, from 39 percent in its base case, if the sale proceeds are used to decrease borrowings.
“Importantly, the deleveraged balance sheet provides financial flexibility for KREIT to lower its cost of capital in 2020 when the call option on the S$150 million 4.98 percent perpetual securities is due,” It said. “Our estimates suggest this could raise the average DPU growth from now to 2022 to 2.1 percent per annum (from 1.9 percent per annum in our base case.)”
Nomura said that Keppel REIT’s DPU growth would be primarily driven by contributions from its 50 percent-owned 311 Spencer Street in Melbourne, Australia, which is scheduled for completion next year.
Units of Keppel REIT were down 1.71 percent at s$1.15 at 11:59 A.M. SGT, while the Straits Times Index was off 2.70 percent.