K-REIT – CIMB

Still unattractive despite rental revisions

• Maintain Underperform. With positive pre-leasing momentum and rental growth, we upgrade our rental assumptions for One Raffles Quay (ORQ) and Marina Bay Financial Centre (MBFC). We raise our FY11-12 DPU estimates by 3-18% after factoring in higher rental growth and lease review assumptions. Our DDM (discount rate 7.2%) target price accordingly climbs to S$1.43 (from S$1.26). Also, should Keppel Land inject its 87.5% stake in Ocean Financial Centre (OFC) into K-REIT, any accretion would depend on asset price and source of funding. Maintain Underperform with yields remaining unattractive after our rental revisions. De-rating catalysts include lower-than-expected rental reversions, in our view.

• Rental revisions for ORQ and MBFC. With positive news flow on rental movements and strong pre-leasing momentum, we raise our rental assumptions for ORQ and MBFC and update lease review assumptions for ORQ. We now expect 30% of the leases to be renewed each year in FY11-12 for ORQ, which should mitigate the DPU fall expected when ORQ income support expires in FY12.

• Accretion from OFC acquisition? With the impending completion of the MBFC acquisition, we ran a scenario analysis to determine the impact of injecting Keppel Land’s 87.5% stake in OFC into K-REIT on K-REIT’s FY12 DPU. In view of KREIT’s limited debt headroom, any transaction will likely entail equity fund-raising. Whether the deal is accretive will depend on the actual price and source of funding.