KepREIT – CIMB

Another solid quarter

KREIT’s 3Q13 DPU was in line, meeting 25% of our FY13 forecast. Key positives include 1) management’s proactive refinancing of loans due in 2014 and 2015, 2) completion of the acquisition of 8 Exhibition Street, Melbourne, and 3) achieving Temporary Occupation Permit of OFC Phase 2.

KREIT’s 9M13 DPU was in line with consensus and our expectations, forming 76% of our FY13 forecast. In view of a stable outlook, we maintain our Neutral rating on this stock with an unchanged DDM-based target price (discount rate: 8.3%) of S$1.32.

Flattish DPU growth

KREIT continued to exhibit its ability to acquire yield-accretive assets, with its latest acquisition being a 50% interest in 8 Exhibition Street in Melbourne. As highlighted previously, although we were positive about its acquisitions in Australia, we expect its long-term growth to be dampened by 1) lost of income support from its existing properties, and 2) dilution from new units. During the quarter, KREIT issued 95m units to finance its latest acquisition. As a result, 3Q13 DPU was flat qoq. During this period, OFC Phase 2 (comprising a 7-storey retail structure and car-park annexe) received Temporary Occupation Permit. However, due to the rent-free fitting out period, we expect contribution from the retail segment to be minimal in 2013.

Proactive loan management

In 3Q13, management refinanced S$282m and S$60m of loans due in 2014 and 2015, respectively. Thus, the weighted average term to expiry of borrowings has been extended to 3.8 years (from 3.6 years). Currently, KREIT’s all-in interest rate stands at a healthy 2.15% with its aggregate leverage ratio dropping slightly to 43.9%.

Positives factored in

By refinancing its debts early, the overhang of rising interest rates has essentially been removed. However, we believe that these positives have already been factored in its share price. We remain Neutral on this stock as it is currently trading in line with its peers’ valuations.