KREIT

KREIT: 2Q15 distributable income of $54.8m (+3% y/y) were generally in line with expectations, even though DPU slumped 9.5% to 1.72¢, due to an enlarged unit base following an issue of new units to fund the acquisition of MBFC Tower 3 in 4Q14.

Revenue fell 9.3% to $43.0m, and NPI dropped 11.4% to $34.7m (+0.3% q/q), weighed by the absence of income from Prudential Tower (divested in 3Q14), lack of rental support for Ocean Financial Centre (expired Jan ’15) and MBFC Phase One (Tower One and Two).

On a sequential basis, revenue and NPI improved 1.3% and 0.3% respectively, largely buoyed by stronger performance from OFC and Bugis Junction Towers.

For 1H15, the office REIT achieved double-digit positive rental reversion of 18% with a retention rate of 84%. As at quarter end, committed occupancy remained at 99.3%.

Aggregate leverage remained elevated at 42.6%, near the 45% regulatory limit and with 35% of debt pegged to floating rates, KREIT appears vulnerable to rising interest rates. Despite this, management has no plans to raise equity.

Weighted average cost of debt now stands at 2.5% with debt to maturity is at 3.9 years.

Notably, KREIT has introduced its maiden distribution reinvestment plan to conserve cash but with the risk of further DPU dilution on the cards.

Moving forward, Maybank-KE notes that KREIT has locked up 80% of leases until 2017 and beyond. As such, the house believes the trust would be able to ride out the softening demand for prime office space.

Following its 9.3% drop since late Apr, KREIT now trades at 0.81x P/B and 6% annualised yield, versus its office peer average of 0.9x P/B and 6% yield.

Latest broker ratings:
UOB Kay Hian maintains Buy with TP of $1.42
HSBC maintains Buy with TP of $1.35
Maybank-KE maintains Buy with TP of $1.32
Normura maintains Neutral with TP of $1.21
Deutsche maintains Hold with TP of $1.17
RHB maintains Neutral with TP of $1.13