In my opinion, Keppel Reit has a potential price of $1.5, a 26% upside from current price. Here is why I think so.
Improving returns
Net Property Income for YTD Sep 2013 increased 9.9% y-o-y to $100.9 million due mainly to improved performance from Ocean Financial Centre and the additional contribution from
8 Exhibition Street, a premium freehold Grade A office building in prime central business district (“CBD”) of Melbourne, Australia
Keppel REIT’s weighted average lease expiry (“WALE”) remained at healthy levels of 8.3 years and 6.4 years for its top ten tenants and the entire portfolio respectively
Capital management
Their debt structure allows for no refinancing till 2015, an interest rate of 2.15% for debt and 75% unencumbered property.
Calendar trend
I believe a rally happens from november to december. So if you are looking at 10% upside, Keppel Reit has a reasonable profile. With a 6.6% dividend yield at current prices, it should provide some cushion to any sudden fall in prices.
Supporting trend
With rental revision for offices expected to rise next year due to Grade-A office crunch. Additionally, Ocean Financial Centre recent TOP - REIT prices may just rise soon, especially with an increased float to 55.4% from 22.5% previously, improved liquidity will help improve prices.
Risks
- Temasek just divested 109.5m shares. (To a smarter investor hopefully?)
- Highly geared at 40% debt/asset ratio (potential rights issue for acquisitions or cushioning debt may cause sharp share prices fall)
- 99.4% occupied leaves potential for possible defaulting tenants and limited upside of 0.6%.
- Office assets in Australia may be suffering from slowing economy there - that being said, Australian govt. cutting lending rates to 2.5% would help.
Read the latest quarter presentation below.
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