K-REIT – CIMB

Acquisition potential but fairly valued

• In line; upgrade to Neutral from Underperform with higher target price of S$1.21 (from S$1.01). 2Q10 DPU of 1.64 Scts met our expectation and consensus, forming 26% and 24% of the respective full-year forecasts. K-REIT took the opportunity to announce its acquisition of 77 King Street in Sydney. We raise our FY10-12 DPU estimates by 4-22% after raising portfolio occupancy and rental assumptions for 275 George Street and factoring in contributions from the newly acquired Sydney property. Accordingly, our DDM-based target price rises to S$1.21 (discount rate: 7.2%) from S$1.01. Upgrade to Neutral as K-REIT’s strong financial position presents opportunities for acquisition growth, though we prefer a Neutral rating on a lack of concrete details. Re-rating catalysts could come from increased clarity on yield accretion from asset injections like Phase 1 of Marina Bay Financial Centre and positive rent reviews for One Raffles Quay.

• NPI grew 49.3% yoy. Net property income of S$18.4m was up 49.3% yoy on additional stakes in Prudential Tower and 275 George Street. Qoq, NPI grew 32.4%, thanks to increased recognition of 275 George Street acquired in Mar 10. 2Q10 DPU of 1.64 Scts was, however, down 37.9% yoy due to an enlargement in the share base following its rights issue in Nov 09.

• Portfolio occupancy improved to 97.9%. 2Q10 portfolio occupancy jumped 1.9% pts qoq and 3.0% pts yoy. Average rentals for its Singapore portfolio edged lower to S$8.19 from S$8.30 as at Mar 10, though management believes rentals had bottomed in the quarter.

• Acquisition of 77 King Street in Sydney. K-REIT announced its agreement to acquire 77 King Street, a Grade A commercial building in Sydney for A$120m (S$145m). The acquisition will be made on a fully-leased basis with income top-up of up to A$2.0m (S$2.4m) will be provided to make up for any shortfall in rent for any space not fully-leased within a period of two years. Completion of the acquisition is expected in 4Q10. We raise our FY11-12 DPU estimates marginally as increased NPI contributions are partially offset by higher borrowing costs and withholding tax.