K-REIT

Kim Eng on 17 Jul 2012

Growth led by OFC contributions. K-REIT reported a stellar 94.6% YoY increase in its 1H12 distributable income of SGD98.4m, underpinned predominantly by the contributions from Ocean Financial Centre (OFC). 1H12 DPU came in at 3.84 cents, broadly in line with expectations. On a QoQ basis, DPU rose by 2.1% mainly on OFC’s improved occupancy rate. The REIT has been a strong outperformer year-to-date as investors remain yield-hungry. Maintain HOLD.

Portfolio occupancy stays robust. K-REIT currently enjoys a very healthy portfolio occupancy rate of 97%. The occupancy rate at OFC has also improved to 92.3% compared to the 85% as of end-2011. Outstanding lease renewals and rent reviews for 2012 are negligible. Management revealed that recent leasing enquiries had come mainly from legal firms, some of which are new-to-market names, but their appetite had been restricted to smaller spaces. Nonetheless, K-REIT’s high occupancy rate and long portfolio WALE of 6.2 years should mitigate any potential downside if office rents continue to slide.

No immediate capital management woes. Even though K-REIT’s look-through gearing is relatively high at 43.9%, we believe this is still very manageable. Its current average all-in interest rate is at a low 2.0%, and management is confident of refinancing the SGD598m worth of debt maturing on 31 Dec 2012. In addition, the acquisition of MBFC Tower 3 does not appear on the cards in the immediate term, especially when commitment rates there are still fairly low at about 67%.

HOLD for the stable yields in the near term. We are keeping our forecasts and target price of SGD0.99 unchanged. We estimate that KREIT should be able to maintain DPU yields of ~6.6% (at current share price) each year till FY15, even if in our view, office spot rents are not likely to see a significant rebound within the next 12 months. Maintain HOLD.