Stable but higher risk
Although we like KREIT for the growth potential of its portfolio amid the recovering office market, its high asset leverage, coupled with a possible loss of income support from its existing properties, dampens the positivity.
As Keppel REIT (KREIT) continues to grow its presence in Australia (currently accounting for c.17% of total NPI), we factor in the risk premium of the Australian market into our model. As a result, our DDM-based (discount rate: 8.6%) target price is lowered slightly to S$1.25. Under our revised rating structure, our call has changed from Neutral to Hold.
Growing Australia exposure
Since 2010, KREIT has been steadily increasing its footprint in Australia. As of 3Q13, total contribution from its Australia portfolio had risen to c.17% of the REIT’s NPI. Given that the risk premium is different from Singapore’s, we adjust our discount rate using a geographical NPI weighted average assumption. As a result, our discount rate for KREIT increases from the previous 8.3% to 8.6%. Having said that, exposure to Australia allows KREIT to enjoy a long Weighted Average Lease Expiry (WALE) of 6.4 years – significantly above the office market average of 3-4 years. Looking ahead, we expect KREIT’s growth to come from additional contributions from its recently-acquired 50% interest in 8 Exhibition Street in Melbourne and the OFC Phase 2 (comprising a 7-storey retail structure and car park annexe).
High asset leverage with income support concern
In 3Q13, management refinanced loans of S$282m due in 2014 and S$60m due in 2015. Thus, the weighted average term to expiry of its 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% - one of the highest within the S-REIT sector. In addition, the ability to bring passing rent to the level at which it is supported (estimated at c.S$13/psf/mth) at OFC by 2015 or earlier remains a concern.
KREIT is a Hold as concerns about high asset leverage and the potential loss of income support dampen positivity.
Publish date: 02/12/13