K-REIT – Nomura

Brisbane acquisition completed

 Action
KREIT yesterday announced the completion of its acquisition in Brisbane. In this, a follow-up to our email (Adds prime Grade A office building in Brisbane to portfolio, 1 February, 2010), we revise up our estimates. The acquisition adds 0.6-0.7Scts to KREIT’s FY10-12F DPU, on our numbers, while our NAV estimate and price target are little changed at S$1.40. BUY maintained.

Catalysts
How KREIT deploys its balance-sheet capacity amid disappearing acquisitive opportunities and, on the other hand, increases stock liquidity will be key catalysts.

Anchor themes

With REITs having grappled with the issues of refinancing, the spectre of revaluation deficits and negative rental reversions should dominate. We see risks being priced in the office sector, though we retain our view that the market has been too complacent in its assessment of the retail and industrial REIT sectors.

 Acquisition of 275 George Street completed
KREIT yesterday announced the completion of its acquisition of a 50% stake in 275 George Street in Brisbane. The all-in acquisition cost of S$225.1mn was funded by rights proceeds raised in 4Q09. In our model, we have assumed rents for the 40,307 sq m occupied by Telstra and Queensland Gas on 10-year leases escalate at an annual rate of 5.5% from A$500-550psm in FY09, and rents for the retail space now occupied by Cicada remain constant at A$1,000psm over our forecast period. In addition, we have assumed a withholding tax rate of 7.5% in arriving at our estimates. There is an annual net income guarantee of A$12.8mn/year till June 2012.
 

Raising FY10-12F DPU by 0.6-0.7Scts

As highlighted previously, we had assumed the 30-month loan of S$390mn from Keppel Corp would be repaid with the rights proceeds. Following the acquisition, we are now assuming in our model a partial repayment of S$300mn with the remaining rights proceeds. Overall, we raise our FY10-12F DPU by 0.6-0.7Scts — a 1-1.2Scts accretion from 275 George Street’s income, offset by a 0.1Sct increase in tax expenses and a 0.3-0.4Sct increase in net finance costs.

Reiterating BUY; price target tweaked to S$1.40
We value KREIT’s newly acquired 50% stake in 275 George Street at its all-in acquisition cost of S$225.1mn and because the acquisition is funded by cash, there is minimal change in our NAV estimate and price target (now S$1.40, from S$1.41, on account of a marginal change to our FY10F net debt estimate). Our price target implies a potential total return of 34.8%, including a projected FY10F yield of 6.4%. Trading at an implied EV of S$1,183psf for its SG office portfolio, valuation remains undemanding, in our view.