K-REIT – Lim and Tan

Why Wait For Circular?

• The transactions between the 2 companies:

– K-Reit buys the 1/3 stake in Marina Bay Financial Centre Towers 1 (NLA of 57,671 sqm) &2 (95,867 sqm) as well as the Marina Bay Link Mall (8,776 sqm; MBFC Acquisition ) for $1426.8 mln / $2450 psf.

(K-Reit’s portfolio rises from $2.5 bln to $3.4 bln, 90% of which will be in the prime Raffles Place and Marina Bay precinct. Weighted average lease to expiry increases from 5.7 years as at end Jun ’10, to 7.8 years. Percentage of NLA committed under long term leases of 5 years or more increases from 36% to 64%.)

– K-Land provides $29 mln rental support for the fitting-out periods when rent and maintenance charges will not be received, till Dec 2014.

– K-Land buys GE Tower / Keppel Tower (NLA of 430,112 sf; KTGE divestment) for $573 mln / $1332 psf. K-Reit recognizes $26.3 mln profit. K-Land will redevelop this into a residential project with 5.6x gross plot ratio.

– K-Reit will borrow $821 mln, utilize $41.5 mln proceeds from last year’s rights issue and sale proceeds from the KTGE divestment to finance the acquisitions. There will be no need to issue new units as with the acquisition of One Raffles Quay (ORQ).

COMMENTS

1. The MBFC Acquisition is no surprise, being expected by investors, especially since the towers were fully committed.

2. But what is disappointing is that the 2 companies chose to be reticent about what really matters most to investors, ie is the acquisition yield accretive ? (Investors would just have to wait for the circular to be released.)

3. Fact is, K-Reit is selling the 2 “old” assets at a yield of 3.23% (Net attributable profit of $18.5 mln / $573 mln sale price). Reticence suggests yield from MBFC Towers 1&2 may be lower. (According to the statement, pro-forma Distributable Income / DPU for 2009 drop to $44.072 mln from $70.519 mln; and to 3.27 cents from $5.28 cents respectively.)

4. One could “surmise” that there will be little yield accretion, thanks largely to the record low interest rate environment, which allows K-Reit to borrow cheap (average borrowing cost to drop to 3.05% from 3.54% ) and push gearing once again to the hilt of just under 40% from 15.2% before the latest transactions. (We have been wondering which among the property-related companies will be able to benefit from record low rates after rushing to lower their gearing in the aftermath of the Financial Crisis – just look at K-Reit for instance.)

5. K-Land merits a BUY, being a clear beneficiary of the latest inter-group transactions, having made it clear its intention to redevelop the 2 CBD-fringe office buildings into residences, itself a positive for office rentals. (Technically, K-Land looks good too.)

6. As for K-Reit, the unnecessary uncertainty as the circular is being “finalized” suggests HOLD remains appropriate for now. We maintain preference for CapitaCommercial Trust, which should soon decide on the redevelopment of the Market Street CarPark.

(K-Land owns 612,588,450 K-Reit units, or 45.64% of the total issued. Keppel Corp’s total deemed interests, including K-Land’s, totals 1,020,022,898 units or 75.99%.)