K-REIT – CIMB

Meeting a lowered bar

Hit by fears of an office slowdown and some dissent over its OFC acquisition, K-REIT had underperformed STI by 22% in the past year. With multiple negatives priced in and increased confidence after our meetings, we see room for it to meet or surpass expectations.

We raise DPU to factor in stronger rental and occupancy assumptions. Allied with a reduced beta and discount rate, we raise our DDM target price (disc. rate: 8.7%) and upgrade the stock to Neutral from Underperform. Catalysts could include positive take-up at OFC.

Management still sanguine

We foresee portfolio stability for K-REIT despite office headwinds, underpinned by its superior assets, limited near-term lease expiries and income support for MBFC and OFC. A recent meeting with management spurs confidence, with the update that K-REIT has yet to detect signs of distress among its tenants or receive further requests for subletting. Renewal rents and rent-free periods are still stable, while management is in talks for take-up at OFC, Prudential Tower and 77 King Street.

Cash-call risks mitigated

While we were previously wary of risks of cash calls, we think stable capital values in a liquidity-fuelled environment could stave off these for now, particularly if MBFC Tower 3 is only acquired in 2013. Though cash calls are inevitable for this acquisition, we expect dilution to be more muted given an enlarged equity base and the potential divestment of its Australian (the values of its Australian assets have climbed) or older local assets for funding.

Upgrade to Neutral

With multiple negatives priced in and a lowered bar, we see room for it to meet or surpass expectations. Potential bright spots are improved take-up at OFC, a stronger-than-expected office market and a purer prime office portfolio if MBFC Tower 3 is funded by the divestment of its Australian or older assets.