K-REIT – CIMB

Prefer Suntec Reit for now

• Initiate with Underperform and DDM-derived target price of S$1.01 (discount rate 7.2%). While we like K-REIT for its pure office exposure, strong financials and pipeline of assets for acquisition, we believe these have largely been priced in. We are concerned about potential DPU declines with the expiry of income support for One Raffles Quay (ORQ) in 2012. Coupled with a lack of details on yield accretion from a potential injection of the first phase of Marina Bay Financial Centre (MBFC), we believe K-REIT could Underperform the market at current valuations and prefer Suntec REIT which offers similar exposure and higher yields.

• Expiry of income support for ORQ in 2012. K-REIT received S$23m in income support in FY09, which contributed 24% to its income in FY09. With most rents at ORQ framed by long leases and locked in at the rates of 2004-05 when rentals were much lower, current review and renewal rates may not be sufficient to allow rental income to catch up with income support following the expiry of the latter. We believe DPUs could in fact fall by 21% yoy in 2012 as a result.

• MBFC injection unlikely to be significantly yield-accretive without income support, due to high costs of debt and/or equity. We believe an injection at current market rates (4.5% NPI yield) may not be yield-accretive, even if we were to assume 100% funding by debt which avoids dilution from equity-funding.