Kep REIT – DBSV

Fair value for a strong and steady portfolio

• Results in line
  
• Robust occupancy, long leases provide income stability
  
• Downgrade to HOLD on valuations
  

Results in line with expectations. Kreit reported an 80.4% y-oy rise (+1.5% qoq) in its 4Q top-line to $40.8m while NPI grew 84.7% y-o-y and 2.2% q-o-q to $32.8m. The higher jump in NPI was driven by the additional contribution from OFC. Taking into consideration the higher interest income from MBFC Phase 1 and 8 Chifley Square, distribution income improved 45.1% y-o-y to $51.9m translating to a DPU of 1.97cts. NAV rose to S$1.30/unit on the back of revaluation gain of c.S$140m. Cap rates for its Singapore and Australia portfolio are at 4.0% and 6.6%-7.0%, respectively.

Robust occupancy, forward leasing and long leases mitigate downside leasing risks. All local office assets (except Ocean Financial Centre at 95.9%) are 100% occupied. The Reit’s proactive leasing efforts in forward locking its leases have also reduce FY13 lease expiry and rent reviews to 4.4% and 3.0% respectively, which should help to mitigate leasing risk. Meanwhile, Australia properties continue to enjoy high occupancy of 97.4%-100%. Including the recent acquisition of the Old Treasury Building office, weighted average lease expiry tenure is c.7.0 years implying strong income visibility. As for ORQ, the underlying monthly rents of a c.S$9 psf are still below the income support level of c.S$10 psf. We understand that the group is still in the midst of rent review for some of their tenants. Post the review, rents should move up nicely. Going forward, earnings will be driven by (i) the additional contribution of Old Treasury Building, (S&P will likely completes in 1H); (ii) completion of the OFC retail and car park podium and 8 Chifley Square in the 2H13; and (iii) tax savings from the conversion of MBFC Phase 1 to LLP structure.

Downgrade to HOLD on valuations. We continue to like Keppel Reit for its stable and resilient cashflow, the share price is now trading close to our TP. We have downgraded our call to HOLD on valuations. While the next catalyst could come from acquisitions, we think an accretive acquisition could be modest as current physical prime office yields are trading at sub 4%. We see re-rating catalysts from stronger rentals reversions.