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.

K-Reit may buy stake in MBFC

K-REIT Asia is looking to add to its portfolio and may take a stake in the upcoming Marina Bay Financial Centre (MBFC).

The commercial real estate investment trust said this yesterday after releasing its results. Net property income was $13.4 million for the fourth quarter ended Dec 31, 2009 – up 13.8 per cent from a year ago.

Earnings were lifted by positive rental revisions and contributions from newly purchased strata floors in Prudential Tower. Distributable income to unitholders also rose, by 11.4 per cent to $19.4 million.

However, distribution per unit (DPU) fell as the unit base grew from a $620 million rights issue in November last year. DPU in Q4 was 1.45 cents, down 45.7 per cent from 2.67 cents a year ago. Adjusting for the rights issue, DPU in Q4 last year would have been 1.32 cents, reflecting a 9.8 per cent increase.

K-Reit will pay out 2.77 cents per unit on Feb 25, for July 1 to Dec 31.

At a press briefing, K-Reit manager CEO Ng Hsueh Ling said that the trust is actively looking at acquisition opportunities. She told BT that a stake in MBFC held by its parent Keppel Land is under consideration. This confirms what several analysts have been deducing in the past few months.

The Reit has not struck a deal because the first phase of MBFC is still on its way to completion. ‘We will only look at it when there is greater stability of income,’ Ms Ng said.

And because a deal between K-Reit and Keppel Land would be an interested party transaction, both sides will have to work on getting the ‘right and best value’ for their investors, she added.

K-Reit has considerable capacity for acquisitions because of the rights issue. As at end-December, its aggregate leverage was 27.7 per cent, almost the same as that a year ago. This could drop to 9.1 per cent should it pay off a loan due to Kephinance Investment.

Its debt headroom would be about $438-648 million, assuming an aggregate leverage of 30-40 per cent.

K-Reit’s portfolio value stood at $2.1 billion as at Dec 31, which works out to an average of $1,616 per sq ft (psf). This is 5.3 per cent lower than a year ago.

The portfolio occupancy rate slipped to 95 per cent from 99 per cent over the same period. On a brighter note, the average portfolio rent in December last year inched up to $8.16 psf.

For FY2009, K-Reit’s net property income grew 23.3 per cent to $48.9 million. Distributable income to unitholders also increased 21.1 per cent to $70.5 million.

Annualised DPU was 5.28 cents – 40.7 per cent less than the 8.91 cents a year ago. The annualised distribution yield would be 4.8 per cent based on K-Reit’s closing unit price of $1.10 as at Dec 31.

Annualised DPU would have risen 19.7 per cent year-on-year if the FY2008 figure was adjusted for the rights issue to 4.41 cents.

K-Reit units gained two cents yesterday to close at $1.20.