K-REIT – DBSV

Acquisition-led growth

• FY10 earnings lifted by new acquisitions

• Robust earnings visibility, addressing earnings growth

• Maintain Hold with TP of $1.24

Achieved 4Q10 DPU of 1.7cts. Kreit reported a marginal 2% qoq drop in revenue to S$21.4m in Q4 from sale of KTGE Towers. However, NPI remained flat at S$17.5m, inclusive of a small marginal impact from MBFC1 and 77 king St in Australia as these acquisitions were completed in the latter part of Dec. Contributions from these assets helped to offset the income vacuum from sale of KTGE Towers. Lower financing costs of 2.75% (vs 3.4% in Q3) helped boost distribution income by 2% to S$23.2m, translating to a DPU of 1.71Scts. The group also took in a revaluation surplus of S$32m, lifting book NAV to $1.48. Overall occupancy rate remained robust at 97%

Long WALE provides income visibility, addressing earnings growth via strategic acquisitions. Looking ahead, Kreit will continue to benefit from the improved office leasing market. Its weighted average lease to expiry of 7.65 years provides good income visibility. However, near term renewals of 7% of NLA this year, largely from Prudential Tower and Bugis Junction, with another 8% of leases due for rent review, could limit short-term organic rental growth. In addition, the anticipated expiry of income support from ORQ by end FY11/early FY12 could mean moderated earnings growth. As such, we expect the group to remain on the lookout for strategic accretive pan-Asian acquisition opportunities. Gearing as at end Dec 2010 stands at 37%.

Maintain Hold. Although we see limited earnings upside, the improving office rental market and capital value cycle is likely to benefit the group’s underlying asset value in the medium term. This will underpin Kreit’s valuation and share price. Maintain Hold with a DCF-backed TP of S$1.24.