K-REIT – DBS

An unexpected move

• Raising $620m in rights issue
• 30-36% DPU dilution
• Downgrade to Fully Valued, TP $1.01

Proposed rights issue. K-reit has proposed to raise $620m through a 1-for-1 rights issue priced at $0.93 each. The price is at a 21.2% discount to the last closing price of $1.18 and 11.8% below the TERP of $1.06. The renounceable issue is fully underwritten by sponsors Keppel Corp, Keppel Land and BNP. An EGM will be held to seek shareholders approval. Proceeds from the issue will be used to repay debt, including the bridging loan for the Prudential Tower strata space purchase (80.8%), fund new acquisitions and AEI at KTGE (18.5%) and issue expenses (0.7%). At the same time, Kreit wrote down the value of its properties by 6.3% to $1970.2m as at Sep 09.

30-36% DPU dilution. Post rights, Kreit’s gearing will fall from 33% to 9.1%, translating to a debt headroom of $438.3-647.8m, assuming target gearing of 30-40%, for new acquisitions. On a post rights basis, adjusting for interest savings, DPU will be diluted by 36% to 6cts in FY09 while FY10 DPU will be adjusted to 6.5cts, after imputing $115m of new acquisitions at 5% return.

Timing of exercise unexpected. We are surprised by the timing of this exercise. While we note that all of Kreit’s debt is maturing around the same period, they are not due till 2011, 18-20 months away. Post the issue, FY09-10 DPU yield is diluted to 5.7-6.1% based on the TERP of $1.06, on the lower end of the 6-8% yield range of comparable peers. Lack of catalyst, with office rents expected to continue on a
downtrend, albeit at a slower pace, would continue to limit share price upside performance. Downgrade to Fully Valued with a DCF-based TP of $1.01 (rights-adjusted $0.95).