K-REIT – CIMB

And the leasing continues

K-REIT’s portfolio remains hardy with continued lease take-ups at some key assets. Management also highlighted that it is not looking at an acquisition of MBFC Tower for now, allaying fears of near-term equity fund raising. We think yields of 7% remain compelling for now.

2Q12/1H12 DPUs were in line with our estimates at 26/51% of our full-year numbers, but slightly above consensus. We raise our DPUs and DDM target price (disc. rate: 8.2%) on adjustments to interest costs and rental support. Maintain Outperform on favourable risk-reward.

Tick-up in occupancy 2Q12 distributable profit was up 90% yoy, due to acquisitions. Qoq, DPU benefitted from a partial quarter of tax savings from MBFC Phase 1 and additional stake in OFC. Key positives came from the continued leasing – albeit for smaller spaces. Portfolio occupancy ticked up to 97.0% from 96.1%, mainly from higher occupancy at improved occupancy at OFC, Prudential, MBFC 1 and 77 King St in Australia.

And the leasing continues

Leasing interest in the quarter was dominated by new-to-market legal firms. Management noted largely positive rental reversions for its renewals/reviews. There have been some enquiries for small spaces at OFC, but management is holding out for tenants willing to take up at least half a floor. Rents are still at ‘low-teens’ for its super Grade A properties and S$9+psf for smaller spaces at Prudential, with management noting that it had not offered more incentives for tenants. Management has not seen more formal requests for subletting at its super Grade A properties.

Not looking at MBFC Phase 2 for now

Management noted that it has not started reviewing a potential acquisition of MBFC Phase 2 and that it will monitor occupancy. This should allay fears of a sizeable equity fund-raising, given current asset leverage of 43.9%. We think that the high current yields of about 7% should limit accretion and inhibit an acquisition for now.