Keppel REIT – CIMB

Bright spots but upside limited

3Q12 provided a positive read-through of a stable office market. Yields are compelling but we see this as compensatory for the high asset leverage and limited accretion expected from the acquisition of MBFC Phase 2 (given the likely need for equity fund raising).

3Q/9M12 DPUs were broadly in-line with our and consensus estimates at 26/77% of our FY12 estimates. We tweak DPUs on adjustments to income support and withholding tax. Our DDM-target price is however higher due to a lower discount rate of 7.7% (prev. 8.2%). Maintain Neutral.

Leasing continues

3Q12 distributable profit was up 93.6% due mainly to acquisitions. Qoq, DPU was up a marginal 1% on improved NPI and tax-transparency from MBFC Phase 1. Results provided a positive read-through of a stable office market: Take-ups remain positive, lifting portfolio occupancy to 98.2% from 97.0%, mainly from OFC (95.0% from 92.3%), Prudential Tower (100% from 99.5%) and 77 King Street (97.4% from 92.7%). Signing rents remained fairly stable at S$8-9psf at Prudential Tower and S$12-13psf at Ocean Financial Tower, with no additional incentives offered. Leasing interest for the latter came from a mix of fund management and new-to-market legal firms.

High asset leverage

Aggregate leverage at 44% is the highest in the sector, even without factoring in its recent Australia purchase. While this is expected to be less of a concern now that capital values remain buoyed by low interest rates, higher asset leverage could still warrant equity fund-raising needs for the remaining tranches of its Aussie purchase and a potential acquisition of MBFC Phase 2. Notwithstanding, we understand that KREIT has yet to indicate its interest for the asset.

Maintain Neutral

Forward yields are compelling but we see this as compensatory for its higher asset leverage. This should warrant equity fund-raising needs for further purchases, which could in turn limit accretion. Maintain Neutral on limited upside.