K-REIT – DBSV

Deepens presence in Australia

• Results lifted by Brisbane contributions

• Acquiring Sydney CBD office building for A$120m

• Maintain Hold, TP $1.20

Performance boosted by Brisbane asset. Kreit reported a 27.6% sequential rise in topline to $23.2m in 2Q10 while NPI improved 32.4% to $18.4m, thanks largely to a full quarter’s income from the Brisbane office building and better performance from its S’pore properties. The S’pore portfolio enjoyed higher occupancies of 97.6%, which more than offset the dip in average rents to $8.19psf/mth as Kreit locked in some forward leases that carry higher existing rents. Distribution income rose 23.3% qoq to $22m, translating to a DPU of 1.97Scts.

Acquires Sydney office building. At the same time, Kreit announced the purchase of a 170,662sf Grade A office/retail property at 77 King St in the Sydney CBD for A$120m (S$145m) or at a 7.6% cap rate. The property has a WALE of 5.8 years and existing leases have inbuilt annual rental escalation clauses. As the property is currently 76.8% occupied, there is a 24-month rental guarantee of A$2m for any rental shortfall due to vacancies and a further A$4m income support for 6 years as the property is relatively under-rented compared to market rents in the vicinity. Major tenants include Fitch Australia, CapGemini, Herbert Greer and Expedia Australia. The deal is accretive and the long leases are likely to provide another stable income source to partially offset the expected dip in earnings when ORQ’s income support expires in FY12. The new buy will be funded by the remaining rights proceeds and new debt. Gearing is expected to increase from 15.2% to 20.4%.

Lifting FY11F earnings, TP raised to $1.20. FY11 DPU raised by 10.6% to 7.3Scts to factor in the additional income from the new purchase. The S’pore office rental market has bottomed out and will continue to benefit from increased demand as GDP is projected to grow by a strong 13-15% this year. This will underpin Kreit’s income. The stock is trading at FY10-11 yield of 5.6-6%. Maintain Hold with revised DCF-backed TP of $1.20.