4Q14/FY14 DPUs fell 23.4%/8.2% YoY on lower rental support as well as higher  borrowing  costs.  Reiterate  NEUTRAL  and  DDM-based  SGD1.18TP  (CoE: 7.3%, TG: 1%), implying a 2.1%  total return.  All eyes are now on OFC to hit its breakeven rent when its  first tranche  income support depletes  in  1Q15  for  the  87.51%  stake  of  the  property  acquired  from Keppel  Land  on  14  Dec  2011.  We  have  factored in the  MBFC  Tower  3 acquisition into our estimates. 

4Q14/FY14 results in line.  Keppel REIT (KREIT)  posted a 23.4%/8.2% YoY decline in 4Q14/FY14 DPU, meeting 18.7%/96.1% of our full-year estimates.  The  decrease  came  on  the  back  of  the  expiry  of  rental support for  Marina Bay Financial Centre (MBFC) 1 and 2, lesser support contributions from  Ocean Financial Centre  (OFC),  and higher borrowing costs. Portfolio occupancy rate remained unchanged QoQ at 99.3%,  but aggregate leverage edged  up to 43.3% (3Q14: 42.1%)  on  the MBFC 3 acquisition. All  in ,  financing  cost remained flattish at 2.23%.  It  renewed and  reviewed  ~450k  sq  ft  of  leases  in  FY14  at  17%  positive  rental reversion, with 55.4% of the new leasing demand from tenants outside the financial sector. KREIT will be refreshing 420,000 of leases in FY15. 

Room  to  minimise  potential  income  shortfall.  The  first  tranche income support for the 87.51% stake of OFC acquired from Keppel Land (KPLD  SP,  BUY,  TP:  SGD3.88)  will  deplete  in  1Q15.  Management previously cited the monthly breakeven rent for OFC at SGD12.60-12.70 psf, higher than our estimated average passing rent of  SGD9.32  psf for 4Q14.  Given  the  lack  of  new  Grade-A  office  supply  in  the  central business  district  from  now  until  2017,  we  see  room  for  KREIT  to progressively minimise this potential income shortfall.

MBFC  3  acquisition  completed on  16  Dec.  We  have  factored  in  the MBFC  3  acquisition  into  our  estimates.  We  assume  a  passing  rent  of SGD9.11  psf/month  vis-à-vis  the  rental  support  breakeven  rent  of SGD10.80  psf/month.  In  addition,  we  forecast  a  DPU  CAGR  of  0.3%over FY14-17,  with the expiry of the second  income  support tranche  for OFC  (the  remaining 12.49% stake)  in 2016.  Reiterate  NEUTRAL  with  a TP of SGD1.18.  Risks to our TP include unfulfilled tenancy replacement for  Standard Chartered Bank  at MBFC 1  and Royal Bank of Scotland  at One Raffles Quay (ORQ),  and  a  further dip  in FY15-16 DPU, following early depletion of OFC's second tranche rental support.

Source: OSK-DMG