K-REIT – CIMB

Digesting OFC

With the beginning of job cuts and upcoming office supply, we think it’s too early to turn positive on K-REIT. Though nowhere near breaching loan covenants, risks of cash calls are fairly high, given its high aggregate leverage.

4Q11/FY11 reported DPU is broadly in line with consensus and our estimates, at 19/95% of our FY11. We fine-tune our DPU estimates but keep our DDM-based TP (disc rate: 9.6%). Maintain Underperform.

Office headwinds

4Q11 DPU was down 18% yoy and 29% qoq as contributions from Ocean Financial Centre (OFC) were overwhelmed by higher interest costs and an enlarged unit base after its rights issue. The dip should be temporary given only two weeks of contribution from OFC vs. full unit-base expansion. While a new tenant has been secured for OFC (taking occupancy to 85% from 80%) and remaining lease expiries are limited in FY12, occupancy was flat at Prudential Tower (94%) and 77 King Street (88%) from 3Q.

Delayed impact

We reckon that the impact of an office slowdown could have been delayed, as businesses slow towards year-end and with job cuts only starting to kick in. Management has yet to note major signs of tenant distress, with asking rents still quite stable. So far, one tenant at MBFC 1 has raised the topic of subletting though it has yet to go ahead with the proposal.

Aggregate leverage at 42%

While management is comfortable with current leverage, we remain concerned about the potential of office asset devaluations. K-REIT’s assets are pegged to levels in Oct 11 when OFC was being acquired, implying downside risks. We foresee a cash call for Marina Bay Financial Centre Phase 2 though this could be pushed back on concerns of corporate governance after the OFC acquisition.