K-REIT – DBS

Results in line

At a Glance

• Results in line, lifted by positive rental reversions
• Moderating leasing environment
• Maintain fully valued, TP $1.11

Results in tune with estimates. Kreit’s 11.4% yoy jump in distribution income to $19.4m (DPU 1.45cts) is in line with expectations. This was achieved on a 13.8% rise in net property income to $13.4m while revenue increased a higher 19.1% to $17m. The better performance was due to higher rentals on reversion as well as contributions from the additional strata space acquired at Prudential Tower. Portfolio occupancy of 95% was slightly better than a quarter ago but below last year’s 99%. The group recognized a positive $21.1m surplus on its portfolio value over the level in Oct 09, bringing total writedown to $71.7m for the year, translating to book NAV of $1.47.

Operating environment moderated but still challenging. Operations wise, the office leasing market has experienced some recovery in demand as economic conditions improved. However, rents are expected to continue declining, although at a smaller pace than before due to oversupply while tenants’ flight to quality buildings would mean a more challenging leasing environment for older office buildings. On the acquisition front, the group’s current balance sheet is under optimized with a net gearing of <1% following its recent rights issue and would enable it to pursue a pan Asian acquisition strategy or for asset enhancement activities.

Recommendation

Maintain Fully Valued, TP $1.11. Amongst office Sreits, Kreit’s yields of 5.2% and 4.9% for FY10 and FY11 respectively are on the lower end of the 5-7% range. We believe a re-rating catalyst would appear only when it deploys its funds into new acquisitions both in Singapore and overseas.