K-REIT – DBS

Venturing Down Under

• Maiden foray into Australia, with purchase of a 50% stake in commercial building for A$166m
• DPUs raised by 12% in FY10 and 15% in FY11, taking into account contributions from this purchase
• Maintain Fully Valued with slightly higher TP of $1.13

Maiden overseas acquisition. K-reit has ventured overseas with the purchase of a 50% stake in a commercial property in Brisbane for A$166m (S$208m). 275 George St is a Grade A building with 40317sm of office and 1431sm of retail space. Average occupancy is 99.4% with the office tower fully occupied. Quality tenants include Telstra Corp and Queensland Gas Co. The weighted average lease to
expiry is 9.4 years underpinned by 10-year lease commitments from these 2 major tenants.

Diversifying income source. In terms of financial impact, the deal will be fully funded by the recent rights proceeds (post acquisition gross gearing at 25.2%) and is DPU enhancing, based on an annualized net profit yield of 5.9% (net profit of A$9.7m) compared to its implied yield of c4%. The vendor would provide an income support of A$1.8m over the income guarantee period till Jun 2012. We note the yield accretion and diversification merits of this deal. However, as Singapore would remain the key earnings contributor, accounting for three quarters of total income, the additional contribution is unlikely to fully offset the
expected negative rental reversion impact from its Singapore properties kicking in from FY10.

Risk-adjusted TP raised to $1.13. We are lifting our FY10 and FY11 DPU estimates by 12% and 15% respectively to take into account the latest contributions. Recent share price had brought valuations back in line with its sector peers, at FY10 and FY11 DPU yield of 6.5-6.4% respectively. Our risk-adjusted TP is adjusted up slightly to $1.13.

K-REIT