Maybank KE starts coverage of Keppel Reit, Suntec Reit with 'sell' calls

Singapore

MAYBANK Kim Eng has initiated "sell" on both Suntec Real Estate Investment Trust (Suntec Reit) and Keppel Reit with target prices of S$1.20 and S$0.90 respectively.

This comes as the research team sees further deterioration and headwinds for the Reits, it said in separate reports.

Maybank KE analyst Chua Su Tye said Suntec Reit's slow retail recovery and rising office vacancy due to increasing work-from-home trends suggest weak fundamentals.

Mr Chua said the Reit's inorganic initiative is a silver lining, as contributions rise in 2021 from 21 Harris Street and 477 Collins Street in Australia, together with the recently-acquired Nova properties in the UK.

Although these are likely insufficient to fully offset downward pressure in its existing operation, they could help it wean off capital distributions, which have been supplementing dividends, he added.

Maybank KE noted that Suntec Reit's gearing post-Nova acquisition is the highest among peers at about 43 per cent. While Suntec Reit is keen on asset recycling to further lower gearing, the research team sees a neutral distribution per unit (DPU) impact given weak pricing power in this cycle.

"We see an overhang from a potential dilutive equity raising as Suntec Reit continues to pursue acquisition opportunities, given the high 43 per cent gearing, and valuations at 0.7 time price-to-book value," Mr Chua said.

Meanwhile, he said Keppel Reit's DPU was "unexciting versus peers". The research team continues to see headwinds for leasing out vacancies and at pressured rents, especially in the coming quarters as firms reassess options post-Covid-19.

Maybank KE anticipates further downsizing by Keppel Reit's financial institution tenants - which comprise about 36 per cent of its net lettable area.

The research team noted that acquisition growth remains challenged by the Reit's high trading yield versus tighter office yields. Deals are likely to dovetail with Keppel Reit's sponsor's plan to monetise S$3 billion to S$5 billion in assets, including Keppel Bay Tower and Keppel Towers, which has been earmarked for redevelopment.

Suntec Reit units closed flat at S$1.54 on Thursday, while Keppel Reit units closed at S$1.11, up S$0.03 or 2.8 per cent.