K-REIT – DBS

Deepens hold on Pru Tower

• Buys 67300sf at Prudential Tower at 15% below valuation
• Strengthen strategic hold but muted earnings impact
• Maintain Hold with TP of $0.99

Strengthens strategic hold. K-reit has enlarged its ownership of Prudential Tower to 73% of the total strata space with the purchase of 67300sf NLA for $106.3m or $1579psf. This price is fair given it is 15% below market valuation of $1850psf and 24% sub the Dec 08 book value of $2066psf for its existing space. The deal will be totally debt funded, thus lifting K-reit’s current gearing from 27.6% to 31.1%.

But muted near term earnings impact. The deal comes with up to a total $5m of net income support for 5 years after completion of the transaction. Based on the proforma FY08 net income of $5.5m (inclusive of support), NPI yield is estimated at 5.2% yield. While downside risk is protected by the income support structure, earnings accretion from this purchase is marginal given that the NPI yield of 5.2% (based on $5.5m proforma FY08 net income inclusive of support) is marginally better than the present implied yield of 5.15%.

Maintain Hold. Deceleration in the pace of office rental decline and increasing dealflows in the office sector indicate some stabilization in the sector. However, transaction yields of >5% are still on the higher end of the historical band of 4.2-6%, highlighting the still cautious outlook within this segment. This deal will benefit Kreit in the long run when the office market recovers. In the near term, downside risk is small as is immediate additional earnings impact. Thus, maintain Hold with TP of $0.99.