Keppel REIT – DBSV

Occupancy keeper

• Results in line; 9M DPU is 76% of our FY12 forecast
  
• Healthy take-up, stable rents backed by high occupancy rates and low expiry leases
  
• Kreit Asia renamed as Keppel REIT
  
• Maintain BUY, DCF-backed TP unchanged at S$1.28
  

Highlights

Results in line. On a y-o-y basis, K-REIT’s gross revenues and NPI more than doubled to S$40.2m and S$32.1m respectively, led by an enlarged portfolio. On a q-o-q basis, revenue grew by a more stable 2.3-2.6% backed by improving occupancy rates at all properties, tax savings at MBFC Phase 1 and the additional contribution from a GST rebate from One Raffles Quay (ORQ). Distributable income was S$51.7m or 1.96cts DPU (+85% y-o-y, +1% q-o-q). To mark its next chapter of growth, K-Reit Asia will be renamed as Keppel Reit.

Our View

Stable rents backed by strong occupancy. Demonstrating its strong leasing capabilities, portfolio occupancy inched upwards to 98.2%. Take-up came from existing tenants, as well as new tenants from the shipping, insurance, fund management and legal sectors, with space requirement from as small as 2,000 sf to 50,000 sf. The high occupancy also translates to better holding power in terms of rents. Monthly asking rents at Prudential Towers and OFC held firm at c.S$9 psf and the low teens respectively with standard incentives provided to the tenants.

Limited downside risk, earnings growth from enlarged portfolio. Looking ahead, we see limited downside risk to revenue. Lease expiry for 2012 is now close to nil with only 14% of its net lettable area to be renewed or reviewed next year. The reit is already actively looking at renewing 2013 leases and interest from tenants is relatively encouraging. Meanwhile, additional contribution from its recently acquired Perth asset, the progressive completion of 8 Chifley Square and the full contribution from Ocean Financial Centre should continue to lift revenue.

Recommendation

Maintain BUY at S$1.28 TP. We continue to like the reit for its strong earnings visibility supported by long-weighted lease expiry of 7.2 years. While gearing has increased to 44.1%, we note that its other financial metrics remained healthy including management confidence in refinancing its S$598m due end of the year. FY13/14F yields at 6.6-6.7%, one of the highest among REITs. Maintain Buy at an unchanged DCF-backed TP of S$1.28.