K-REIT – DBSV

Results in line

• 3Q10 distribution income up marginally 3.2% qoq, in line

• Revenue is likely to see limited near term upside

• Maintain Hold with TP S$1.20

In-line set of results. Kreit reported a marginal 6.3% qoq decline in topline to $21.8m in 3Q10, mainly due to a correction to the straight-line accounting of rental income reported in 2Q10 from the 50% stake in 275 George Street, while NPI dipped a smaller 4.8% to $17.5m on lower property expenses. However, the adjustment had no impact on the distributable income, which rose by a modest 3.2% to $22.7m (DPU: 1.69cts). The increase in distributable income was largely due to lower borrowing costs of 3.4% (vs 3.54% in Q2). Occupancy rate increased by a slight 1.3ppt qoq to 99.2% with an additional 29100sf of new take up.

Limited upside in the near term. Its portfolio is running at almost full capacity, and there is limited rental reversion upside as most of the leases up for renewal would be inked at the peak in 2007. However, downside risks are now capped as demand improved. As highlighted in our previous report, we view the purchase of MBFC1 and sale of KTGE as a longer term positive for the Reit. The acquisition will upgrade its portfolio quality and extend the average portfolio lease expiry profile from the present 5.7 years to 7.8 years, although near term income boost would be relatively small. In their 2011 forecast, the group has indicated a net 5.3% rise in distribution income and 4% better DPU impact from the purchase of MBFC1 and sale of KTGE. Post acquisition, Kreit’s gearing would rise to 39.1%.

Maintain Hold. Although we see limited revenue upside in the near term, the improving office rental and capital value cycle is likely to benefit the group’s underlying rental and asset value in the medium term. This will underpin Kreit’s income. Maintain Hold and DCF-backed TP of $1.20.