- DPU stable y-o-y at 1.97 Scts, in line
- Portfolio fully occupied; REIT to benefit from rising demand for space at Marina Bay area
- Maintain HOLD, TP S$1.29
1Q14 results. KREIT booked S$47m revenue (+13% y-o-y), S$39m NPI (+15%), and S$55m distribution income (+5.5%) for the quarter. Topline growth was driven by (a) better performance at Ocean Financial Centre (OFC) and Prudential Tower, and (b) new contribution from 8 Exhibition Street (acquired In Aug-13). There was also higher contribution from MBFC Phase 1, leading to 13% growth in associate income. Financing costs rose 13% to S$14.5m due to an expanded portfolio. DPU was flat at 1.97 Scts on a larger share base after several equity fund-raising (EFR) exercises in FY13.
Marina Bay: positive leasing momentum to ease negative impact of loss of income support. KREIT will see 3.1% and 6.3% of NLA due for renewal and rent review, respectively. We understand the majority of these leases are for OFC and MBFC Phase 1 where passing rents are lower than market currently. Given healthy office leasing momentum in the Marina Bay area, we expect 10-15% uplift in those rents. This should mitigate the slight drop in rental income as income support from MBFC Phase 1 had expired last quarter. Income support from OFC also fell to S$10.5m due to larger share of retail leases and other ancillary income (advertising and signage).
Early debt refinancing to stabilise interest cost. KREIT continued to be proactive in capital management by refinancing S$350m of debt due in FY15 (38% of total debt) and FY16 (16%), terming out debt to 3.9 years from 3.5, while maintaining
fairly low all-in interest cost of 2.18% (vs 2.15%). In addition, the REIT has hedged 68% of total borrowings with fixed rate debt to minimise risk to rising rates in the near term.
High acquisition hurdle. Given high gearing of 42%, future acquisitions would have to be financed via EFR, which will be difficult to execute given high implied yields compared to market. Despite the availability to acquire MBFC Phase 2 from its Sponsor Keppel Land, K-REIT would be hard pressed to make any DPU accretive acquisitions at this point given that cap rates for office assets in Singapore are c.4% currently.
Maintain HOLD, TP S$1.29. We like K-REIT for their quality prime Grade A portfolio. Further clarity on the planned acquisition of MBFC Phase 2 and funding could be re-rating catalysts.