Keppel REIT Earnings: Change in Management Fees to Hit Near-Term Distributions but Lower Dilution

We retain our fair value estimate of SGD 1.16 per unit for Keppel REIT after an in-line second-half 2024 performance. However, our distribution per unit, or DPU, forecasts for 2025-27 were lowered by 5.0%-6.9% after updating our assumptions to account for increased borrowing costs, higher distributions to perpetual securities upon reset, and the latest change in management fees. The REIT manager is electing to receive 25% of its fees in cash and 75% of its fees in units from 2025 onward, compared with the current 100% in units. Management shared that this move is in line with market practice. In our view, this move could result in lower distributions in the near term but helps decrease the dilution to unitholders over time due to a slower unit base expansion. Despite lower DPU estimates, the trust still trades at an attractive 6.7% distribution yield for 2025 and remains our top pick for Singapore REITs. We like the REIT for its high-quality office portfolio, and we see it as a key beneficiary of a favorable Singapore office market that is tightening due to limited supply.