K-REIT – DBS

Yield provides support

• Slightly above expectation
• Positive reversion more than offset higher vacancy
• Outlook stabilizing, visibility remains poor
• Raising forecast, maintain Hold with TP $0.95

Results ahead of estimates. Kreit reported an 18% yoy rise (+4% qoq) in topline to $15.4m. NPI grew 34% yoy and 14% qoq to $12.3m while distribution income improved 23% yoy to $17.5m. DPU of 2.64cts works out to an annualized yield of 10%. No revaluation exercise was carried out in 1H09.

Higher rentals filled vacancy slack. The modest sequential rise in topline was the result of positive rental reversions being offset by higher vacancy level of 94.9% (-0.9% pt qoq). Average portfolio rents were $8.13psf vs $7.37psf a year ago. The higher jump in NPI was due to the impact of lower property tax, reduced marketing and utilities costs. Outlook for the office rental market has stabilized, however, visibility remains poor with demand remaining subdued this year. With asking rents ranging between $7-9psf (excl ORQ), we expect negative rental reversion to kick in next year. Kreit has a remaining 8% and 26% of NLA to be renewed/reviewed in 2H09 and 2010 respectively.

Valuation undemanding but lacks near term catalyst. At 0.46x P/bk NAV and implied office values of $995psf, Kreit’s valuation is undemanding. Portfolio resilience through its long weighted lease to expiry of 5.4 yrs provides stability in income base. However, we are hard put to find re-rating catalysts in the near term. We have raised FY09 and FY10 DPU to 9.4cts and 9.1cts respectively to reflect a slightly better than projected occupancy level vs our earlier assumption of 90%. This translates to yields of 10-9%. Maintain Hold with TP of $0.95.