In-line 2Q14/1H14 results
KREIT posted a 3.6%/1.8% YoY decline in 2Q14/1H14 DPU, meeting 24.6%/50.2% of our full-year estimate. The decrease came on the back of the expiry of MBFC rental support and higher borrowing costs. Portfolio occupancy rate was slightly down 40bps to 99.4%, with some tenants churn at Ocean Financial Centre (OFC) and 77 King Street. Aggregate leverage edged up to 42.8% in 2Q14 (1Q14: 42.4%), with higher all-in financing cost of 2.2% (1Q14: 2.18%).
Room to minimise potential income shortfall
The income support for OFC will cease in 2017. Management cited the monthly breakeven rent for OFC’s rental support at SGD12.60-12.70 psf, which is higher than our estimated average passing rent of SGD9.20 psf for 2Q14. Given the lack of new Grade A office supply in the Central Business District from now until mid-2016, we see room for KREIT to minimise potential income shortfall.
MBFC Tower 3 is over 90% occupied and KREIT has yet to announce any acquisition plans from its sponsor. To fund this hefty acquisition of SGD1.1-1.3b, equity fund raising remains on the cards, in our view. The SGD512m divestment of Prudential Tower is likely to complete by September. We forecast flat DPU CAGR over FY13-19E with the progressive expiry of income support.
We keep our DPU forecasts unchanged and reiterate our HOLD recommendation with an unchanged DDM-derived TP of SGD1.32 (cost of equity = 6.9%; Tg = 1%).
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