Results did not surprise. Keppel REIT (KREIT) reported a 4Q12 distributable income of SGD51.9m (+45% YoY, flat QoQ), while full-year distributable income surged by 79% YoY to SGD201.9m. These were due mainly to contributions from Ocean Financial Centre (OFC). Full-year DPU was 7.77 cents, in line with expectations. KREIT’s portfolio occupancy is a healthy 98.5%. Maintain HOLD on valuation.

Portfolio near full-occupancy. With the exception of OFC which has a committed occupancy of 95.9%, the rest of KREIT’s Singapore properties are effectively at full-occupancy. Management continued to cite demand as coming from energy and resources companies, legal firms and corporate services providers. In the fourth quarter itself, nearly 80% of the leases were signed with new tenants, with the remaining 20% coming from existing ones seeking expansion.

FY13 growth drivers. Underpinning DPU growth in FY13 will be rent reviews to be carried out at One Raffles Quay (ORQ), where we expect positive rental reversion as under-rented leases are marked-to-market. In addition, the retail and car park podium at OFC and 8 Chifley Square are on track for completion in 3Q13. Management is also comfortable with KREIT’s current gearing level of 42.9%, considering that the interest coverage ratio is a high 4.8x.

Likely pause in Australian acquisitions. KREIT will be shortly completing the purchase of the Old Treasury Building in Perth, Australia, and management is happy to maintain status quo with four Australian assets, unless a very compelling value proposition comes along. In fact, management alluded that it could possibly consider divesting one or more of its Australian properties at the right price to help fund future acquisitions. In addition, management stated that it has yet to review the possible acquisition of MBFC Tower 3. We reiterate that a likely triggering event would be when the occupancy improves to above 90%, up from the last reported 76%.

Maintain HOLD. We raise our DDM-derived target price to SGD1.25 as we adjust our cost of equity and terminal growth rate assumptions, and maintain our HOLD recommendation base on valuation grounds.

Source: Maybank Kim Eng Research - 22 Jan 2013