K-REIT – CIMB

Positives priced in

• 3Q10 in line; maintain Underperform and target price of S$1.26. 3Q10 DPU of 1.69 Scts met our expectation and consensus, forming 25% of our full-year forecast. 9M10 DPU of 4.65 Scts represents 70% of our forecast, in line considering backend-loaded contributions expected from Australian assets acquired in the year. K-REIT also released a forecast of its consolidated statement from its recent acquisitions and divestments. We fine-tune our FY10-12 DPU estimates by -1% to +1% but keep our DDM-based target price of S$1.26 (discount rate 7.2%) intact. Maintain Underperform with limited accretion from its recent asset swap, and unattractive FY10 DPU yields of 4.8% vs. Suntec REIT’s 6.5% and CCT’s 5.2%. Derating catalysts could include lower-than-expected rental reversions.

• 3Q10 NPI grew 42% yoy. 3Q10 net property income of S$17.5m was up 42% yoy on contributions from additional stakes in Prudential Tower and 275 George Street. A 37% yoy decline in DPU was attributable to an enlargement in its share base after its Nov 09 rights issue though total distributable income grew 26% on the back of the NPI increase. Qoq, 3Q10 DPU was up 3% on lower borrowing costs.

• Occupancy rose to 99.2%. Portfolio occupancy improved 1.3% pts qoq to 99.2%, largely due to new tenants secured at Bugis Junction Towers. Leasing demand was driven by a mix of new tenants and expansion by existing tenants. Though average portfolio rent was not disclosed, we believe this could have been flat or marginally lower qoq. The 100% completion of FY10 rent reviews should, however, help to curb any near-term decline in average portfolio rents.

• Release of forecast statement. Accompanying the results, K-REIT released a FY11 forecast of the consolidated statement from its recent acquisitions (Marina Bay Financial Centre Phase 1 and 77 King Street) and divestment of Keppel Towers and GE Tower. K-REIT’s FY11 DPU estimate of 6.68 Scts for its enlarged portfolio is lower than our assumed 7.23 Scts due to lower rental and occupancy assumptions for its local portfolio. We have kept our FY11 DPU estimate largely unchanged.