K-REIT – CIMB

A fuller OFC

We are net positive on K-REIT’s acquisition of another 12.4% in OFC, with increased control and good placement price outweighing slight negatives from higher asset leverage. Placement price of S$1.17 (15% premium to VWAP) could provide a benchmark for the share price.

We raise our DPU estimates and DDM-based target price (discount rate: 8.2%), factoring in accretion from the purchase. Maintain Outperform on favourable risk-reward. We see catalysts from an earlier bottoming of the office market and tax savings.

What Happened

K-REIT announced the acquisition of an additional 12.4% stake in Ocean Financial Centre (OFC) for S$261.6m (S$2,380 psf) or S$285.7m (2,606psf) including S$24.1m in income support till Dec 2017 from Avan Investments. This acquisition will take its stake in OFC to 99.9%.Equity cost of S$228m will be funded by a mix of debt (S$158.2m) and equity (S$70.2mprivateplacement at S$1.17apieceto Ong Holdings, 14.6% premium to VWAP of S$1.02, though still below NAV at 0.9x P/BV).

What We Think

Overall acquisition price and terms were fairly similar to that for K-REIT’s acquisition of its initial 87.5% stake back in Oct 11. Slight difference came from a lower support quarterly NPI of S$27.6m (prev: S$30.5m) and rental of S$13-14psf. Positives came from increased control and stake in the asset and premium on the placement price (which could seta target/support for share price). We understand that K-REIT had approached the vendor forthe purchase who apparently paid a premium to VWAP due to his confidence in K-REIT. Slight negatives however came from a fairly high aggregate leverage of 43.9% (previously 41.8%) after the deal.

What You Should Do

Overall, we are net positive on the deal, as we see advantages from increased control in OFC and good placement price, outweighing slight negatives from higher asset leverage. We raise our DPU estimates and DDM-based target price (discount rate: 8.2%), factoring in accretion from the purchase. Maintain Outperform on favourable risk-reward.