K-REIT : UOBKH

Smallest But Purest

Among the office REITs under our coverage, K-REIT Asia (K-REIT) is the smallest in terms of asset size (S$677m). It is, however, a pure office play consisting of four quality office buildings: Prudential Tower (44%), Keppel Towers, GE Tower and Bugis Junction Tower.

Strong rental reversions as key growth driver. With its portfolio consisting of purely prime office assets, K-REIT will benefit from strong rental reversions with its substantial and increasing lease expiries till at least 2010. Lease expiries for 2008-2010 are 14.3%, 24.8% and 27.6% respectively. Committed portfolio occupancy levels have already hit a high of 99.4%. Despite limited upside from occupancy enhancement and little likelihood of any asset-enhancement programmes, we believe upside from rental revisions will drive the stock.

DPU upside from acquisitions. Management has targetted acquisitions of S$2b within the next few years, with initial focus on Singapore because of the great growth potential in the office segment here. In the long term, however, it has a Pan-Asian commercial mandate for its investment portfolio. Its acquisition target of S$2b is achievable for a few reasons: a) K-REIT has been inactive in terms of acquisitions since it was initiated, and b) its parent Keppel Land, whch owns a number of quality office assets, might inject these assets into K-REIT for an assetlight structure.

Initiate coverage with BUY; target price: S$3.39. We initiate coverage of K-REIT with BUY at a target price of S$3.39, implying a 15.9% upside and a total return of 18.4% based on our DCF model. With the recent share price weakness, this is a good opportunity to accumulate the stock. We are conservative on K-REIT’s acquisitions and factor in only about S$150m p.a. in view of risks of delay in its acquisition schedule, in part due to the difficulty of acquiring high-yield assets.