K-REIT – CIMB

Expanding presence in Australia

• DPU in line; maintain NEUTRAL. K-REIT’s 2Q11 DPU of 1.93 S cts met both our and consensus expectations as it came in at 26% of our full-year forecast, taking 1H11 DPU to 49% of forecast. There were no major surprises. K-REIT also announced the A$154m-170m forward purchase of a 50% interest in 8 Chifley Square in Sydney. The acquisition will be structured to provide a steady 6.65% yield. Fully funded by cheap local debt, the acquisition should be DPU-accretive. But there are risks associated with going overseas and with a rise in aggregate leverage to above 40% on a full debt drawdown for the purchase. Factoring in the acquisition, we raise our FY12-13 DPU estimates by 2-5%. But our DDM-based target price is trimmed from S$1.52 to S$1.49 as we raise our cost of equity to 7.5% to factor in higher overseas exposure. We remain NEUTRAL.

• No surprises from 2Q11 results. 2Q11 distributable income rose 20% yoy as higher contributions from its acquisitions in 2010 and early 2011 more than offset the loss in contributions from Keppel Towers and GE Tower which have been disposed of. Distributable income increased 8% on qoq basis.

• Occupancy of local portfolio remains strong. Occupancy remained full for all local office assets except MBFC (97%) and Prudential Tower (98%). Occupancy of 77 King Street also improved to 88% from 72% in the last quarter. The effects of negative reversions were moderate and were compensated by higher occupancies. Management also continues to see good tenant demand for its office assets.

• Australian property purchase. K-REIT announced the forward purchase of 50% interest in the yet-to-be-completed 8 Chifley Square in Sydney, Australia for A$154m-170m (S$203.0m-223.3m). The deal will be structured to provide a steady 6.65% yield. Fully funded by cheap local debt, the acquisition will be DPU-accretive though we are not excited as it offers fairly similar spreads (against the risk-free rate) as local assets. Also, there are increased risks associated with going overseas and with a rise in aggregate leverage climbing to above 40% on full debt drawdown for the acquisition.