KREIT – UOBKH

Clarity on the rights issue

8-for-5 rights issue at S$1.39/unit. K-REIT Asia has finalised detailed for the proposed renounceable rights issue. The rights ratio is 8-for-5 (equivalent to 16-for-10). The rights units are priced at S$1.39 each, representing 8.3% discount to prevailing market price. Keppel Corporation and sponsor Keppel Land, who own 72.7% of K-REIT in aggregate, have given irrevocable undertaking to take up their respective allocations of rights units.

K-REIT will raise gross proceeds of S$551.7m (higher than S$446.5m based on our previous assumption of 3-for-2 rights issue at S$1.20), which will be utilised to repay bridging loan from Kephinance Investment, a subsidiary of Keppel Corporation. K-REIT will seek refinancing for the balance of bridging loan of S$391.3m due in Sep 08 with long-term debt. We estimate gearing will be reduced from 57.3% to 29.4% after completion of the rights issue. The rights issue will reduce book NAV from S$3.78 to S$2.26 per share.

Benefiting from positive rent reversions. K-REIT is well positioned to ride the upswing in office rentals with 44.5% of net lettable area (NLA) due for expiry and another 21.9% of NLA due for rent review between 2008 and 2010. Occupancy is 100% for Prudential Tower and Bugis Junction Tower and 99.8% for Keppel Towers & GE Tower. Current asking price is S$15 to S$18psf pm for Prudential Tower and beyond S$10psf pm for Bugis Junction Tower, Keppel Towers and GE Tower. Average portfolio gross rental was only S$4.65psf pm (excluding contribution from One Raffles Quay) in 4Q07. There is significant room for positive rental reversion as leases are renewed at higher rental rates.

K-REIT provides FY08 distribution yield of 7.55%, a whopping spread of 5.24% over 10-year Singapore government bond yield at 2.31%. Our target price is S$1.99 based on two-stage dividend discount model with distribution per unit (DPU) diluted for rights issue starting 3Q08.