K-REIT – DBSV

Gaining full control of OFC

• Acquisition of another 12.39% in OFC for S$2,380 psf

• Funding will be 75% by debt and 25% by placement

• DPU boosted by c.3.0%; Maintain BUY at TP of S$1.21

Strategic long-term positive move. K-Reit announced that it is purchasing a 12.39% interest in Ocean Financial Centre (OFC) from Avan Investment Pte Ltd (AIPL) for S$261.6m. This works out to S$ S$2,380psf, netting off income support of S$24.1m which expires end-2017. Including the rental support, total consideration will be S$285.7m or c.S$2,600psf, which is in line with the 87.5% interest in Ocean Financial Centre (OFC) that the reit purchased from its sponsor in October last year. AIPL will sell the property for a period of 99 years and would have the right to acquire the interest for S$1.00 at the end of the period. Following the completion of the acquisition, K-REIT will gain full control of OFC at 99.9% interest in OFC. AIPL will hold the remaining 0.1%. The new acquisition will start contributing from 2H12.

Funding structure: Committed occupancy at OFC is currently 90.6% with underlying monthly gross rent of slightly below S$10psf. Based on the acquisition price, net yield works out at sub 4% but a higher 4.7% with the rental support. Kreit will fund the purchase with S$216m debt (75%) and S$70.2 m proceeds from a placement of 60m new units. The units were issued at $1.17 per unit, at c.15% premium to the market closing price of $1.02 per unit yesterday, and have been fully subscribed by the vendor. All-in interest rate for the debt is expected to be 2.0% -2.5%.

Maintain BUY, accretive purchase. We estimate that this acquisition will lift FY 12/13 DPU by 1.5-3.2% including the enlarged unit base and the recent tax savings. While gearing is expected to head up to 43.9% post acquisition on a see through basis – higher than its peers – we view this acquisition as a strategic move as this would allow the group to manage the asset more efficiently. Valuation remains attractive at 0.8x P/BV given its strong sponsor link and is offering FY12/13 yields of 7.3%, the highest in the office reit space. Retaining our BUY call at an unchanged DCF-backed TP of S$1.21