KREIT – UOBKH
2QFY08: Benefitting from positive rental reversion
K-REIT’s 2QFY08 results were better than our expectations. K-REIT reported gross revenue of S$13m in 2QFY08, an increase of 31.8% yoy. Revenue contribution from Prudential Tower, Keppel Towers & GE Tower and Bugis Junction Towers increased 66.4%, 33.1% and 21.7% yoy respectively. Contribution from One Raffles Quay (ORQ) totalled S$10.9m in 2QFY08. Average gross rent increased 7.44% qoq to S$7.37psf pm due positive rental reversion. Committed occupancy was 100% at Jun 08.
Distributable income surged 173% yoy to S$14.2m. K-REIT announced DPU of 1.39 cents for the period 8 May to 30 Jun 08. This will be paid on 28 Aug 08.
Benefiting from positive rent reversions. Growth in rental rates has moderated as the recent escalation in office rentals has forced more companies to alternatives such as transitional office space and relocating support functions outside the Central Business District (CBD). Rentals for Grade A office space within Raffles Place increased by a mild 1.7% qoq to S$17.82psf pm in 2QFY08. Occupancy has also dipped slightly from 99.1% in 1QFY08 to 98.3% in 2QFY08 (Source: Colliers). Impact from positive rental reversion will be muted in 2H08 as only 2% of net lettable area (NLA) will be expiring. Positive rental reversion will resume in 2009 with leases for 16.8% of NLA will expire and another 11.3% of NLA is subjected to rent review. Its average portfolio rental of S$7.37 is also significantly below current market rentals.
Refinancing for bridging loan. K-REIT has secured a new revolving credit facility from ultimate parent company Keppel Corporation with interest rate of 3.94% p.a. and maturity in Mar 2011. The interest rate of 3.94% is lower than our assumed worst-case scenario of 4.2%. The arrangement also provides flexibility for K-REIT to refinance to achieve lower cost of debt if conditions in the credit market improve. K-REIT’s gearing has been reduced from 53.9% to 27.7% after completion of the rights issue.
K-REIT provides attractive FY09 distribution yield of 6.6%, a healthy spread of 3.1% against 10-year government bond yield of 3.5%. Our target price is slightly reduced to S$1.67. The stock is trading at a 36.9% discount to current NAV/share of S$2.22.