Category: KepREIT
KeppelREIT – DBSV
Sound operations
- DPU stable y-o-y at 1.97 Scts, in line
- Portfolio fully occupied; REIT to benefit from rising demand for space at Marina Bay area
- Maintain HOLD, TP S$1.29
Highlights
1Q14 results. KREIT booked S$47m revenue (+13% y-o-y), S$39m NPI (+15%), and S$55m distribution income (+5.5%) for the quarter. Topline growth was driven by (a) better performance at Ocean Financial Centre (OFC) and Prudential Tower, and (b) new contribution from 8 Exhibition Street (acquired In Aug-13). There was also higher contribution from MBFC Phase 1, leading to 13% growth in associate income. Financing costs rose 13% to S$14.5m due to an expanded portfolio. DPU was flat at 1.97 Scts on a larger share base after several equity fund-raising (EFR) exercises in FY13.
Marina Bay: positive leasing momentum to ease negative impact of loss of income support. KREIT will see 3.1% and 6.3% of NLA due for renewal and rent review, respectively. We understand the majority of these leases are for OFC and MBFC Phase 1 where passing rents are lower than market currently. Given healthy office leasing momentum in the Marina Bay area, we expect 10-15% uplift in those rents. This should mitigate the slight drop in rental income as income support from MBFC Phase 1 had expired last quarter. Income support from OFC also fell to S$10.5m due to larger share of retail leases and other ancillary income (advertising and signage).
Our View
Early debt refinancing to stabilise interest cost. KREIT continued to be proactive in capital management by refinancing S$350m of debt due in FY15 (38% of total debt) and FY16 (16%), terming out debt to 3.9 years from 3.5, while maintaining
fairly low all-in interest cost of 2.18% (vs 2.15%). In addition, the REIT has hedged 68% of total borrowings with fixed rate debt to minimise risk to rising rates in the near term.
High acquisition hurdle. Given high gearing of 42%, future acquisitions would have to be financed via EFR, which will be difficult to execute given high implied yields compared to market. Despite the availability to acquire MBFC Phase 2 from its Sponsor Keppel Land, K-REIT would be hard pressed to make any DPU accretive acquisitions at this point given that cap rates for office assets in Singapore are c.4% currently.
Recommendation
Maintain HOLD, TP S$1.29. We like K-REIT for their quality prime Grade A portfolio. Further clarity on the planned acquisition of MBFC Phase 2 and funding could be re-rating catalysts.
KeppelREIT – Maybank Kim Eng
In-line results; stable DPU
- 1Q14 results in line with our and market expectations.
- No news of MBFC Tower 3 acquisition from sponsor; equity fund-raising remains on the horizon.
- 1Q14 DPU flat YoY at 1.97 cts. Expect flat DPU CAGR over FY13-18E on income support expiry and marginal passing rents improvement.
What’s New
KREIT posted a 12.9% YoY rise in 1Q14 revenue to SGD46.8m, meeting 25% of our and 24% of consensus estimates. The increase came on the back of improved performance from Ocean Financial Centre and Prudential Tower in Singapore and additional income from 8 Exhibition Street in Melbourne, which was acquired last August. 1Q14 DPU remained flat YoY at 1.97 cts, forming 25% of our and consensus forecast. Portfolio occupancy rate was flat at 99.8% in Singapore with all properties fully leased, but rose to 97% from 95% in Sydney with 8 Chifley Square signing on its latest tenant Natixis. Opened last October, it has only half a floor remaining to
be leased. Aggregate leverage for KREIT edged up slightly from 42.1% in 4Q13 to 42.4% in 1Q14.
What’s Our View
MBFC Tower 3 is 95% occupied to date, but KREIT has yet to announce any acquisition plans from its sponsor. We believe more equity fund-raising is still on the cards, with the possibility of capital recycling Prudential Tower (valued at SGD490m as at 31 Dec 2013) to fund a portion of the hefty acquisition cost estimated at SGD1.1-1.3b. KREIT has, respectively, 3.1% and 6.3% of its portfolio NLA due for lease expiry and rent review this year. We expect marginal improvements in passing rents, with CapitaGreen and South Beach Development due to come on-stream in 4Q14. We forecast flat DPU CAGR over FY13E-18E with the progressive expiry
of income support. Maintain HOLD with an unchanged DDM-derived TP of SGD1.25.
Office REITs – Maybank Kim Eng
Big supply leaves rents in limbo
- The key to rental rate increase in the Central Area lies in continued hiring in the financial, insurance and business services sectors.
- But an uptick in headcount is unlikely this year, considering sub-trend GDP growth, sluggish financial services activities, lower hiring expectations and tightening labour market
- Short-term reprieve next year but ample supply still looms. With vacancy rate tipped to rise in 2016, we see modest rental upticks of 3%/5% in FY14/15 before sliding 2% in 2016.
What’s New
The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s Office Property Rental Index recorded a ~1% YoY increase in rent for both the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came on the back of four consecutive quarters of YoY decline since 3Q12.
What’s Our View
Abundant supply a nagging worry. While we anticipate a reprieve from new office space next year, the fact remains that there is still ample supply – an estimated 6.4m sq ft of net leasable area in the Central Business District (CBD) is expected to come on-stream in 2014-2017. With the labour market moderating and overall hiring expectations on the wane, we do not think headcount numbers will jump sharply this year, especially considering the sub-trend GDP growth and financial services activities remaining sluggish. We estimate net absorption during this year and next would balance out previous outstanding (~4.8m sq ft in the Central Area) and new incoming supplies, leading to an occupancy rate of 90-92% in the Downtown Core (4Q13: 90%). However, in 2016-2017, occupancy rate could slide to 88-90% as ~5m sq ft of new office space becomes available.
Maintain Neutral. With vacancy rate tipped to creep up only in 2016, we see rents rising a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We maintain our Neutral stance on the office REITs sector, with HOLD calls on CapitaCommercial Trust (CCT, TP SGD1.50) and Keppel REIT (KREIT, TP SGD1.25). The key downside risk to our call is an abrupt capital flight from Asia. Liquidity outflows will not only hit asset prices sorely, but may also lead to a cutback in headcount for the financial, insurance and business sectors, causing a dent in rentals.
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.
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.