KepREIT – OSK DMG

KREIT Portfolio Going Strong

Keppel REIT (KREIT) FY13 results were in-line with our forecasts (distributable income SGD214m vs SGD212m DMG estimate). 4Q13 saw KREIT achieved full occupancy in Singapore and official opening for 8 Chifley Sq in Sydney, Australia. Maintain FY14 forecasts and BUY on K-REIT (top pick in REIT sector) with TP of SGD1.66 or potential 43% upside.

KREIT’s assets under management (AuM) increased 10.4%, NAV raised to SGD1.38 due to largely to addition of Australian assets (Old Treasury Building in 1Q13, 8 Exhibition Street in 3Q13) as well as higher capital values (cap rates decreased from 7% in 2012 to 6.7% for Australia whilst Singapore portfolio remained at 4%). This is reinforced by the improved occupancy and positive rental reversion (recent leases signed between SGD12-13psf) across KREIT’s portfolio.

KREIT faces no debt refinancing risks until 2015, has current debt duration of 3.6years, 70% on fixed rates and Interest Coverage Ratio of 5.5x. This should offset concerns regarding its relatively higher than sector aggregate leverage of 42.1%. Portfolio weighted average lease to expirty (WALE) at 6.5years and 41.4% of portfolio on long term leases (more than 5 years) should further assuage concerns on higher interest rate impact /debt servicing capabilities of KREIT.

We like KREIT’s exposure to Grade-A office in Singapore (88% of portfolio). With an expected FY14E distribution yield of 7.5% and currently trading at 0.84x NAV, we maintain our BUY rating on KREIT (our top pick in the REIT sector) with TP of SGD1.66 or potential 43% upside.