KepREIT – CIMB

Steady leasing

The key positives in KREIT’s 2Q13 results were the higher leasing at OFC, successful backfilling at Prudential Tower and the proactive refinancing of loans due in FY14. KREIT’s headline yields are high but we see this balanced by its high asset leverage and income support.

KREIT’s 2Q13/1HFY13 DPUs broadly met consensus and our expectations, forming 25%/50% of our FY13 forecast. We tweak our FY13-15 DPUs and our DDM-based target price (discount rate: 8.3%) higher to factor in its recent acquisition. Maintain Neutral.

Flattish DPU growth outlook

Although we expect a DPU uptick in FY14 from KREIT’s Australian acquisitions, long-term growth is likely to be muted due to the expiry of income support. 2Q13’s DPU was up by only 1.5% yoy due to the higher earnings contributions from OFC and KREIT’s Australian acquisitions being offset by the loss of income support at ORQ and its larger unit base post-placement. Qoq, 2Q13 DPU was flat. The key positives in 2Q13 came from a slight increase in OFC occupancy to 97.9% from 96.6%. Prudential Tower remained 100% occupied as management successfully backfilled several departing tenants. However, rental income was negatively hit by the fit-out periods.

Capital management

Management completed the early refinancing of c.60% of its borrowings due in FY14, which raised the weighted average term to expiry from 3.2 years to 3.6 years. Management noted that the interest costs for bank loans have been stable. Asset leverage was a high 44.2% at end-2Q13 and may rise above 45% if the recent Melbourne acquisition is funded entirely by debt. However, management stated that the acquisition would probably be partially funded via equity and expressed confidence in asset values.

Maintain Neutral rating

We factor in KREIT’s recent Melbourne acquisition, assuming 50:50 debt-equity funding. KREIT’s high headline yields remain its key attraction but we see this balanced by its high asset leverage and income.