Investment Overview
Best-in-class office portfolio. KREIT's best-in-class office portfolio anchored by Singapore Grade A offices in prime CBD locations is well-positioned to benefit from a potential recovery in a very tight net supply market which is expected to last till 2024. Valuation remains attractive at 0.7x P/B with a forward yield of c.6.7%, higher than sector’s average. KREIT is a unique pure-play office REIT with a focus in Singapore, owning one of the best in class properties, a highly valued by investors have yet to appreciate.

Steady organic growth outlook. Singapore's office market is expected to remain stable given solid property fundamentals (tight market vacancy of c.4% coupled with a lack of supply within the core central business district in Singapore). This is expected to drive strong rental reversionary prospects. In addition, we believe that a flight to quality trend could mean resilient occupancies in the medium term. Despite the cyclical nature of the office market, the long weighted average lease expiry (WALE) of c.4.7 years offer some degree of income visibility and stability. KREIT's top 10 tenants which contributes c.32% and a geographically and sector diversified tenant base means no concentration risk to the market performance of any subsector. 

Active asset churn to optimise portfolio drives inorganic growth. KREIT has been very active in churning its assets to optimise and grow its portfolio which we believe will drive inorganic growth and crystalise its book values. The manager keeps a close eye on optimising returns, through active asset recycling at the right opprotunities and price.  

Maintain BUY; TP of S$1.10. We maintain our BUY rating and TP adjusted to S$1.10 on revised esimates. The manager will be looking to shift 25% of its fees to cash (nil previously) with an aim to close the DPU/EDPU gap, a postiive measure. We have trimmed our FY23F-FY24F DPU by 5%-6%, to account for this change.


Risks
Slower-than-expected economic recovery and potential second wave of COVID-19. Key risks to our positive view are a prolonged economic downturn and potential second wave of COVID-19 that could impact rents and vacancies.

Risks to capital values. Should the weak office market outlook persist from prolonged economic downturn leading to a larger-than-expected fall in rents, valuers could downgrade rental and growth outlook, and this could trigger a decline in capital values, which would put the REIT’s NAV at risk.

Interest rate risk. Any increase in interest rates will result in higher interest payments that the REIT has to make annually to service its loans. Nevertheless, the risk is partially mitigated by the fact that c.76% of KREIT’s debts are on fixed rates.

Currency risk. As KREIT earns rental income from its Australian assets in AUD, any depreciation in the AUD would result in relatively lower contributions from Australia to KREIT's total distributable income.