K-REIT in no hurry to buy MBFC3

■ What's new
We see little in Keppel REIT’s (KREIT) briefing for its 4Q12 results announced post-market on 21 January that justifies the recent runup in its unit price.

■ What's the impact
The 4Q12 distribution-per-unit (DPU) of 1.97¢ was 1% below our forecast, while the major operating line items were in line.

There was a marginal QoQ increase in the Singapore occupancy rate (98.5% vs. 98%) and the overall occupancy rate, including at its properties in Australia (98.5% vs. 98.2%). In Singapore, 80% of the leasing take-up came from new tenants (with the rest from existing tenants). At Ocean Financial Centre (OFC), the occupancy improved slightly QoQ to 95.9% from 95%, and the only spaces available are the 5th floor and half of the 42nd floor.

KREIT enjoyed another strong 4Q12 revaluation gain of
SGD217m, on higher valuations for its major Singapore properties (cap rates remained at about 4%, but rental assumptions rose, according to management). KREIT’s NAV increased QoQ to SGD1.32 from SGD1.25. Its aggregate leverage (including those of its associates) fell slightly QoQ to 42.9% (from 44.1%), due to 4Q12 refinancing and the revaluation gain. Management was comfortable with the current gearing level and highlighted KREIT’s healthy interest coverage ratio of 4.8x. Management also gave us the impression that it was in no hurry to acquire its sponsor’s stake in Marina Bay Financial Centre (MBFC) Tower 3 and the deal might not occur in 2013.

We make minor changes to our DPU forecasts. We raise our six-month target price, pegged to parity with our 10-year DDM valuation, to SGD1.28 (from SGD1.26), after rolling forward our 10-year horizon to 2013-22E (inclusive of a terminalvalue estimate).

■ What we recommend
We downgrade our rating on KREIT to Underperform (4) from Outperform (2), after its recent strong unit-price rise (from about December 2012), and given no material change (from mid-October 2012) in the Singapore office sector’s fundamentals. KREIT now trades at what we regard as demanding valuations (at a 5% premium to its NAV as at 31 December 2012 of SGD1.32, the highest in the office sector) for an office S-REIT. With a slight rise in its core average property value of SGD2,472/sq ft for 2012, when office rentals declined by about 10% YoY, we would regard any unit-price premium to KREIT’s NAV with caution. The major risk would be further acrossthe- board yield compression in the SREIT sector.

■ How we differ
Our DPU forecasts are still significantly higher than those of the Bloomberg consensus, as we expect One Raffles Quay to remain resilient in 2013, but we still believe KREIT’s valuations are unattractive.