Awaiting catalysts

KREIT’s 4Q13 DPU was inline with our estimates at27% of our FY13 forecast. Together with the previous 9M’snumbers, FY13’searnings came in at 100% of our full-year estimate. The higher revenue was mainly attributed to the newly-acquired office tower at8 Exhibition Street in Melbourne, and the improved performance of Ocean Financial Centre and 77 King Street. We maintain our Hold rating and keep unchanged our DDM-based (discount rate: 8.5%) target price of S$1.25 as we await more meaningful growth catalysts.

From strength to strength

Keppel REIT (KREIT) just announced its 4Q13 results, with revenue and DPU of S$47.5m (+16.4% yoy) and 1.97Scts (unchanged yoy) respectively. During the year, KREIT completed two acquisitions, namely Old Treasury Building in Perth and 8 Exhibition Street in Melbourne, refinanced all its loans due in 2013 and 2014, completed the construction of OFC Phase 2, and officially opened 8 Chifley Square in Sydney in the last quarter of the year. In 4Q13, occupancy for its Singapore portfolio rose to a respectable 100%, while its Australia portfolio enjoyed occupancy of 99.8%. In addition, gearing improved slightly to 42.1% on the back of a 10.4% yoy increase in AUM, mainly due to the addition of new buildings, and higher capital values in the portfolio.

Positive outlook on the office market

With Singapore’s Grade-A office market expected to perform better on the back of limited supply (0.8m sf a year in the next three years) and global recovery, we are positive on this segment of Singapore’s office market. In addition, with prime grade-A spot rent creeping up to S$9.75 psf/mth in 4Q13 (from S$9.55 psf/mth in 3Q13), we expect to see further positive rental reversions from the 9.7% of NLA (3.4% due for renewal and 6.3% due for rent review) due in FY14. Also, with the completion in 3Q13 of OFC Phase 2, additional income from this property should boost earnings by 0.7% in FY14.

Maintain Hold

Although the outlook for KREIT is positive, these factors have largely been factored into its share price. As such, we maintain our Hold rating and keep unchanged our DDM-based target price as we await more meaningful catalysts, like the potential acquisition of MBFC Tower 3, to come through.

Expect stable distributions

• FY13 results are in line with our and market expectations.
  
• No news on MBFC Tower 3 acquisition from sponsor; equity fund-raising remains on the horizon.
  
• Maintain HOLD. Forecast DPU CAGR of 0.8% over FY13-15E is unexciting in our view.
  

4Q13 – no surprises

KREIT’s FY13 revenue grew 11% YoY to SGD174m, constituting 97% of our and consensus estimates. We would attribute the increase to improved performance from Ocean Financial Centre and 77 King Street, as well as the additional income from the acquisition of 8 Exhibition Street in Melbourne. Full-year DPU rose 1.4% YoY to 7.88 SGD cents, meeting 99.6% of our and 98.5% of consensus forecasts. Portfolio occupancy strengthened from 99.4% in 3Q13 to 99.8% in 4Q13, with all Singapore properties fully leased. 8 Chifley Square officially opened on 29 Oct 2013, and is ~95% committed. The average cap rate for Singapore properties was maintained at 4%, while the average cap rate for Australian properties was 6.7%. The aggregate leverage improved from 43.9% in 3Q13 to 42.1% in 4Q13 on the back of SGD389m of property revaluation gains.

Uninspiring DPU growth prospects

We forecast DPU CAGR of 0.8% over FY13-15E since portfolio occupancy is almost full and lease expiry by net leasable area (NLA) is relatively long at 6.5 years. MBFC Tower 3 is more than 90% occupied, but KREIT said it has yet to approach its sponsor for acquisition. Nonetheless, the likelihood of more equity fund-raising remains on the horizon. KREIT has 3.4% and 6.4% of portfolio NLA due for lease expiry and rent review, respectively, in 2014. We expect a modest 1% rise in passing rents this year, given that CapitaGreen and South Beach Development will come on-stream in 4Q14. Maintain HOLD with the DDM-derived TP unchanged at SGD1.25.

TEMASEK SELLS KREIT STAKE FOR $125M

Placement works out to 3.74% of KReit that Temasek received as dividend.

Temasek Holdings has sold its entire direct stake in office landlord Keppel Reit (KReit) in a share placement that started on Monday evening, sources close to the deal said yesterday.

The deal involved 103,994,321 shares offered at a price range of between $1.195 and $1.21 per share, the sources said. This represents a 1.6‐1.8 per cent discount to the trust’s last closing price of $1.23 on Oct 21. The placement offer amounted to an estimated $125 million.

Temasek continues to hold 21 per cent in Keppel Corp which in turn holds 54.6 per cent in Keppel Land. Keppel itself has less than a 1 per cent stake in KReit following its two rounds of dividend in specie, while Keppel Land remains KReit’s largest shareholder at 44.86 per cent.

Besides Keppel group, the other significant shareholders are Capital Group, Franklin Resources, Goldman Sachs and Aberdeen.

With the Temasek share placement, KReit’s free float will rise to more than 55 per cent from 24.4 per cent in January.

KReit recently posted a 9.9 per cent increase in net property income to $100.9 million for the nine months to Sept 30, 2013. Distributable income rose 6 per cent to $159 million, while distribution per unit rose 1.9 per cent to 5.91 cents.

Management had said that its total portfolio value was more than $6.8 billion. Average por

Another solid quarter

KREIT’s 3Q13 DPU was in line, meeting 25% of our FY13 forecast. Key positives include 1) management’s proactive refinancing of loans due in 2014 and 2015, 2) completion of the acquisition of 8 Exhibition Street, Melbourne, and 3) achieving Temporary Occupation Permit of OFC Phase 2.

KREIT’s 9M13 DPU was in line with consensus and our expectations, forming 76% of our FY13 forecast. In view of a stable outlook, we maintain our Neutral rating on this stock with an unchanged DDM-based target price (discount rate: 8.3%) of S$1.32.

Flattish DPU growth

KREIT continued to exhibit its ability to acquire yield-accretive assets, with its latest acquisition being a 50% interest in 8 Exhibition Street in Melbourne. As highlighted previously, although we were positive about its acquisitions in Australia, we expect its long-term growth to be dampened by 1) lost of income support from its existing properties, and 2) dilution from new units. During the quarter, KREIT issued 95m units to finance its latest acquisition. As a result, 3Q13 DPU was flat qoq. During this period, OFC Phase 2 (comprising a 7-storey retail structure and car-park annexe) received Temporary Occupation Permit. However, due to the rent-free fitting out period, we expect contribution from the retail segment to be minimal in 2013.

Proactive loan management

In 3Q13, management refinanced S$282m and S$60m of loans due in 2014 and 2015, respectively. Thus, the weighted average term to expiry of borrowings has been extended to 3.8 years (from 3.6 years). Currently, KREIT’s all-in interest rate stands at a healthy 2.15% with its aggregate leverage ratio dropping slightly to 43.9%.

Positives factored in

By refinancing its debts early, the overhang of rising interest rates has essentially been removed. However, we believe that these positives have already been factored in its share price. We remain Neutral on this stock as it is currently trading in line with its peers’ valuations.

Most Undervalued Office REIT

We initiate coverage on Keppel REIT with a BUY. Using DCF with terminal growth rate assumption of 3.0%, blended COE of 9.3% (with a 3% risk-free rate, 0.8x beta and 7.88% equity risk premium), we arrive at a SGD1.66 TP. We expect KREIT shares to re-rate over the mediumterm, as its portfolio will likely benefit from Singapore’s low incoming supply of new commercial assets and its high-yielding Australian assets.

Strong income stream. With a weighted average lease to expiry (WALE) of 6.6 years and long term lease (>five years) accounting for 40% of its portfolio, coupled with revenue hedge for its Australian exposure, KREIT’s earnings downside risks appear limited.

Improving stock liquidity, better acquisition currency. The restructuring of Keppel Group’s holdings and its subsequent stake reduction in KREIT has helped improved the latter’s liquidity, with its estimated free float now at 46% (below 25% during its initial years). Not only does this allow greater investor participation, but it also enables greater capital flexibility for potential acquisitions.

Recent sharp share price drop an overreaction. Amidst the volatility in the capital markets since May – whereby the STI index fell 7% and the FSSTREIT index dropped 17.8% – KREIT suffered a 23.6% correction. We see this as overdone, as it implies an 88% decline in KREIT’s forward rental cycle, coupled with a 25% correction in the AUD, all of which points to an overreaction. Hence, we see an excellent opportunity to accumulate a great value REIT with substantial upside.

TP of SGD1.66 provides 35% upside potential. K-REIT is currently trading at a compelling 6.8% FY13F yield, at a substantial 15% discount against its peers Suntec REIT (SUN, NEUTRAL, TP: SGD1.78) and CapitaCommercial Trust (CCT, NEUTRAL, TP: SGD1.45), both trading at 5.8%. We initiate coverage on KREIT with a SGD1.66 TP, which implies a potential upside of 35%.