K-REIT – CIMB

Tax boost fromMBFC 1

Tax transparency for MBFC 1 should allow savings translating to 2-3% of DPU annually. We do not dismiss the possibility of similar conversions and structures for ORQ and MBFC 2, which could allow less tax leakages and potential simplification of holding structures.

We raise DPUs and DDM-based target price (discount rate: 8.2%) factoring in tax savings from K-REIT’s one-third stake in MBFC Phase 1.Maintain Outperform on favourable risk-reward. We see catalysts from an earlier bottoming of office market and furthertax savings.

What Happened

K-REIT has announced that BFC Development Pte Ltd, the entity which holds MBFC Phase 1 has been successfully converted to BFC Development Limited Liability Partnership. This will allow it to obtain tax transparency and not pay corporate tax on itsincome from its one-third stake in MBFC Phase 1.

What We Think

We expect this development to result in savings of about S$4m-5m (2-3%) for K-REIT annually. Savings are not retrospective, implying no claw-backs for previous taxes paid.

Management’s efforts on this are commendable. Previously, the tax leakage, income support and complex holding structures for ORQ and MBFC Phase 1 were some of the key contention points that some investors had when they compared K-REIT’s and Suntec REIT’s portfolios against CCT’s. We do not dismiss the possibility of a conversion for the holding company of ORQ and the use of a similar structure for a potential acquisition of MBFC Phase 2 for increased tax savings.

If these take place, not only will there be less tax leakages, but overall holding structures for portfolio could be less complex (e.g. unwinding of shareholders’ loan for tax shelter) to facilitate shareholders’ understanding and a potential narrowingin valuation gap against CCT.

What You Should Do

Overall, weview this news positively for both its tangible and intangible benefits. Maintain Outperform on favourable risk-reward from a potential bottoming of the office market and cheap valuations (0.8x P/BV and 7.5% yield).