DPU flat QoQ. KREIT reported a 1Q13 distributable income of SGD52.2m (+1% QoQ; +8% YoY), resulting in a 1.97 cts/unit DPU which was similar to 4Q12’s and in line with expectations. We believe that the potential for further equity fund-raising remains, either to pare down its gearing or to fund the acquisition of KepLand’s one-third stake in MBFC Tower 3 sometime in the future. Maintain HOLD.

Assets reporting healthy occupancy rates. KREIT’s portfolio occupancy edged up from 98.5% as at end-2012 to 98.8% as at 1Q13, mainly as OFC’s occupancy rate crept up from 95.9% to 96.6% in the same period. With only 3.5% of leases expiring for the rest of 2013 and another 4.4% in 2014, we expect vacancy risks to be largely mitigated. In fact, KREIT’s weighted average lease expiry (WALE) of 6.9 years remains one of the longest among the S-REITs.

No mention of MBFC Tower 3. In KepLand’s latest update, MBFC Tower 3’s occupancy rate crept up from 79% as at end-2012 to ~84% as at end-Feb. We believe that demand from more non-financial tenants in the coming months could take Tower 3’s occupancy rate above 90% possibly in 2H13 and when that happens, we believe the asset is more amenable to be acquired by KREIT.

More fund-raising still possible. KREIT undertook an opportunistic private placement in Feb to raise gross proceeds of SGD53.2m (40m new units at SGD1.33/unit), which would be largely used for debt repayment and working capital purposes. However, its gearing remains high at 43.3% post-placement, suggesting that more equity will have to be raised to fund the potential acquisition of Tower 3, which we value at SGD1.1b. In our opinion, this could happen in the coming months to take advantage of the stock’s current 1.1x P.B valuation.

Short-term weakness quite possible. We raise our target price slightly to SGD1.27 as we fine-tuned our model, but maintain our HOLD recommendation on the back of limited upside. In addition, KepCorp will be distributing a portion of its stake in KREIT to its own shareholders as dividend-in-specie. The shareholders will receive their KREIT units on 8 May and we expect some sell-down from those shareholders who do not wish to have KREIT in their portfolios.

Source: Maybank Kim Eng Research - 16 Apr 2013