KREIT

Kim Eng on 16 Oct 2012

Quarterly earnings remained steady. KREIT (officially renamed as Keppel REIT wef from 15 Oct) posted a 3Q12 distributable income of SGD51.7m – a 94% YoY increase mainly due to contributions from Ocean Financial Centre (OFC). This was largely in line with expectations. With a 3Q12 DPU increasing 1% QoQ to 1.96 cents, 9M12 DPU now stands at 5.8 cents. We adjust our forecasts to include the recent acquisition of a 50% stake in the Old Treasury Building in Perth. Upgrading KREIT to HOLD, with a fair value of SGD1.09. 

OFC occupancy only improves marginally. KREIT’s Singapore portfolio occupancy remained healthy at 98.2%, but the occupancy rate at OFC improved just marginally from 92.3% in 2Q12 to 95% in 3Q12. All leases expiring in 2012 have already been renewed and only 0.3% of the leases (by NLA) will be due for review in 4Q12.  

Further diversification into Australia. KREIT recently announced that it will be acquiring a 50% stake in the Old Treasury Building in Perth for an estimated consideration of AUD165m (SGD211.2m). The development is only expected to be completed in 2015, but in the meanwhile, KREIT will enjoy an effective return of 7% based on its progressive capital contribution. The Government of Western Australia has already pre-committed to 98% of the net lettable area on a 25+25 year lease, which increases KREIT’s portfolio WALE to 7.5 years.

Fund-raising still a possibility.  Post-acquisition of the Old Treasury Building, KREIT’s gearing is expected to creep up to 45% - right on the cusp of what is generally perceived as an acceptable level for S-REITs. We note that the current commitment level at MBFC Tower 3 has edged up to ~76%. At this rate, the occupancy level could exceed 90% by this time next year, suggesting that the property may be ready for acquisition then. Based on the current gearing level, KREIT would very likely have to undertake an equity fund-raising to fund the acquisition.

Fairly-valued. Due to the long WALE and certain rental supports, KREIT’s DPUs are expected to remain resilient up to FY15F, but the prospect of equity fund-raising remains a near-term overhang. We upgrade KREIT to HOLD, with a DDM-derived target price of SGD1.09.