K-REIT – UBS
Pure office play with strong organic growth
- Initiate coverage with a Buy 2 rating K-REIT
Asia, a pan-Asian commercial REIT, was listed on 28 April 2006 with an initial portfolio of four office buildings in Singapore valued at S$630.7m. Keppel Land, K-REIT s sponsor and manager, is one of the largest listed developers in Singapore by asset size.
- DPU CAGR of 18.7% in 2007-12E on office rental reversions
We believe the signing rent for K-REIT s portfolio could reach S$8.2 per square foot per month (psfpm) by the end of 2007, more than double the passing rent of S$3.74psfpm in 2006. Over the next five years, we expect rental reversion to lift net property income CAGR 17% and distribution per unit (DPU) CAGR 18.7%.
- Possible sponsor acquisitions are not priced into our model
While K-REIT does not have the right of first refusal over Keppel Land s five office assets, we believe Keppel Land is committed to growing K-REIT’s portfolio value to S$2bn over the next few years from the current S$677m.
- Valuation: one-year forward DCF price target of S$3.65
Our DCF valuation is S$3.53 per unit, with our one-year forward DCF-based price target at S$3.65 per unit. At its current price, our estimated 2007 DPU yield for KREIT is 2.8%. Among S-REITs, K-REIT provides the second lowest DPU yield to CapitaRetail China, but the highest DPU CAGR (2007-12E).