4 threats Keppel must watch out for after REIT sell off

It sold down its stake to 51.5%.

According to Barclays, Keppel Corp announced today it had sold down its stake in KREIT to 51.5% from 58.2% previously, through the placement of 180mn units in KREIT.

This follows earlier steps to reduce its holdings in the company through the sale of 75mn units in February 2013 and a dividend-in-specie awarded to shareholders at its AGM. The sale of 180mn units last night at S$1.555 per unit was priced at a discount of 2.8% to KREIT’s closing price of S$1.60 on 20 May 2013.

Barclays noted that key risks include: 1) yields may not be sustainable if prime office rents do not recover above guaranteed levels after expiry of income support, especially for OFC (35% of assets) beyond Dec 2016;

2) KREIT has the highest gearing in the sector at 43.3%; 3) 51% of its tenant base is in the financial services industry, making it vulnerable to any cyclical downturn in this sector; and 4) potential fund-raising needs for the MBFC 2 acquisition, albeit this could be a double-edged sword.

Here's more:

We initiated on KREIT on 6 May 2013 (see Keppel REIT: Initiate at OW; for keeps), with a PT of S$1.70, as we expected it to benefit from a prime office upturn, and expect distributions/ sell-down of Keppel Corp’s stake to raise its otherwise small free float and thus investability.

The latter has partly panned out. Post the most recent 1-for-5 distribution-in-specie exercise, Keppel Corp still had a 12.3% stake in KREIT. Keppel Corp placed out a 6.7% stake last night, reducing this stake to 5.6%, and conversely raising KREIT’s free float to 48.5% from 41.8%.

This will push KREIT from the eighth largest free float market cap SREIT to the fifth largest. We expect trading volumes and hence liquidity to continue to improve.

Should this be sustained, we would expect the potential inclusion of KREIT in well-followed indices such as MSCI Singapore and NAREIT indices.
With the recent outperformance, its yields have compressed to 5.0%. We believe there is still upside potential. Our PT suggests forward yields of 4.7-4.8% and a yield spread of 3.3% which is reasonable for a premium office landlord in our view.  

We think further share price catalysts for KREIT include: acquisition of the 33% stake in MBFC 2 (1.3mn sqft 100% stake, cS$1.1bn attributable value, 16% of KREIT’s assets) from its parent, Keppel Land, in the next 12 months will solidify its number 1 office REIT position in Singapore.