K-REIT – BT

K-Reit slides 5.1% after $620m cash call

Nomura sees rights issue lowering cost of capital for any acquisitions ahead

K-REIT Asia’s $620 million cash call on Wednesday night caught the market by surprise, and its units fell as much as 6.8 per cent or eight cents soon after trading began yesterday.

The counter recovered slightly to close at $1.12, 5.1 per cent or six cents down. Some 3.58 million units changed hands.

Most investors and analysts did not see the one-for-one renounceable rights issue coming because K-Reit’s gearing was comparatively lower than its peers’.

After conducting a rights issue in January last year to raise $551.7 million, it had cut its aggregate leverage from 53.9 per cent to 27.6 per cent.

K-Reit’s debt-funded purchase of six strata floors in Prudential Tower would have raised its leverage to 33 per cent, but that would have remained close to the industry’s average gearing level. The rights issue would shave its leverage sharply down to 9.1 per cent.

K-Reit also revealed a 6.3 per cent drop in the value of its assets on Wednesday, from $2.1 billion as at Dec 31 last year to $1.97 billion as at Sept 29.

OCBC Investment Research analyst Foo Sze Ming believes that K-Reit could be taking advantage of the recent rise in its unit price to boost its balance sheet. The counter crossed $1.20 last month, after staying below that level for almost a year.

K-Reit could be preparing to take on Keppel Land’s stake in the Marina Bay Financial Centre (MBFC), he adds. ‘Tower 1 and 2 of MBFC are due to be completed in 2Q 2010 and the divestment of KepLand’s 33.3 per cent stake in this project could come as early in 2Q 2011.’

Nomura Singapore analyst Sai Min Chow views the rights issue positively because it gives K-Reit more debt headroom, lowers the cost of capital for potential acquisitions and improves stock liquidity.

K-Reit said that it could have an additional funding capacity of around $438.3 million to $647.8 million, assuming an aggregate leverage of 30-40 per cent.

But he also estimates a 31-32 per cent dilution in forecasts of K-Reit’s distribution per unit for FY10-11, and a 27 per cent dilution in its book value.