UOB Kay Hian's Jonathan Koh has kept his "buy" call on Keppel REIT, with a slightly reduced target price of $1.06, from $1.08 previously, with signs of recovery for its Sydney portfolio even as the Singapore assets remain stable.
"KREIT is well-positioned as it has backfilled vacant office spaces ahead of competition from new supply from IOI Central Boulevard Towers," states Koh in his Oct 9 note.
"Its properties in Sydney, 8 Chifley Square, Pinnacle Office Park and Blue & William benefit from companies tightening on hybrid work arrangements," he adds.
Koh believes that Keppel REIT's unit price has been weighed down by the impending distribution in specie by Keppel Corp to its shareholders as part of a special dividend payout.
Entitled Keppel Corp shareholders stand to receive one Keppel REIT unit for each five shares they hold. The distribution, to have a total of 352.4 million units, is equivalent to 9.4% of its total base.
Upon completion of the distribution, Keppel Corp's stake in Keppel REIT will drop from 46.5% to 37.1%.
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Koh notes that Keppel REIT is now trading near its all-time-low price-to-NAV ratio of just 0.62x, or 38% discount to its NAV of $1.34 per unit.
Back in March 2020, when the market was reacting to the start of the pandemic, Keppel REIT's P/NAV reached 0.61x.
"The potential downside from Keppel Corp shareholders selling the KREIT units they received in specie could be limited due to KREIT’s current depressed valuation," suggests Koh.
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"Fundamentally, Keppel Corp’s distribution in specie of Keppel REIT units has no impact on its DPU," he adds.
On its part, Keppel REIT has set aside $100 million from accumulated capital gains to be distributed to unit holders over five years to mark its 20th anniversary in 2026.
The distributions will be made every six months from 2HFY2022 to 1HFY2027 at a pace of $10 million each time.
