KREIT – UOBKH
1QFY08: Positive rental reversion kicking in
K-REIT reported gross revenue of S$11.2m in 1QFY08, an increase of 29.8% yoy. Distributable income surged 165.9% yoy to S$11.4m. K-REIT announced DPU of 4.60 cents for 1QFY08, an increase of 159.9% yoy. The results were substantially better than our expectations as interest expense for bridging loan from Kephinance Investment (estimated at 2.4% compared to our assumption of 3.5%), a subsidiary of Keppel Corporation, was lower than expected.
Revenue contribution from existing properties Prudential Tower, Keppel Towers & GE Tower and Bugis Junction Towers increased 42.8%, 63.4% and 13.6% yoy respectively. The acquisition of One Raffles Quay (ORQ) was completed on 10 Dec 07. Average gross rent increased 14% qoq to S$6.86 due positive rental reversion from existing properties and full quarter contribution from ORQ. The one-third interest in ORQ provided total income of S$10.9m, including income support of S$6.1m. Committed occupancy was 99.6% at Mar 08.
Benefiting from positive rent reversions. K-REIT is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009 when supply of office space in Central Business District is limited. Current asking price is S$15 to S$18psf pm for Prudential Tower and above S$10psf pm for Bugis Junction Towers, Keppel Towers and GE Tower. Average portfolio gross rental was only S$4.65psf pm (excluding contribution from ORQ) in 4Q07. There is significant room for leases to be renewed at higher rates. Rentals for Grade A office space within Raffles Pace gained a further 5.3% qoq to S$17.52psf pm in 1Q08.
Rights issue strengthen equity base. K-REIT Asia has proposed 8-for-5 renounceable rights issue at S$1.39 per unit. 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, which will be utilised to repay bridging loan from Kephinance Investment. K-REIT will seek refinancing for the balance of bridging loan of S$391.3m due in Sep 08 with long-term debt. Gearing will be reduced from 53.9% to 27.7% after completion of the rights issue. Book NAV will be reduced from S$3.78 to S$2.26 per share.
K-REIT provides attractive FY08 distribution yield of 8.84%. We have assumed that the balance of bridging loan from Kephinance Investment is refinanced at steeper interest rate of 4.2%. Our target price is thus reduced to S$1.81, taking into account dilution from the rights issue.