K-REIT – CIMB

Stronger office outlook

• Broadly in line; upgrade to Neutral from Underperform. 4Q10 DPU of 1.7Scts broadly met our expectations and consensus, accounting for 26% of our FY10 forecast. FY10 DPU of 6.4scts forms 96% of our estimate. 4Q10 results were marked by a sharper-than-expected reduction in all-in interest costs. Management is optimistic on forward office rentals and occupancy. Factoring in reduced interest costs and higher occupancy, we raise our FY11-12 DPU estimates by 1-4% and introduce FY13 estimates. Accordingly, our DDM-based target price climbs from S$1.43 to S$1.50 (discount rate 7.2%). Upgrade to Neutral on a stronger outlook and continued compression of physical yields in the office space. Re-rating catalysts could come from stronger-than-expected rental reversions, we believe.

• 4Q10 distributable income grew 19% yoy. K-REIT completed an asset swap of Marina Bay Financial Centre Phase One (MBFC 1) and KTGE Tower and the acquisition of 77 King Street in Australia in Dec 10. 4Q10 distributable income grew 19% yoy, on contributions from its Australian acquisitions as the asset swap (completed in mid-Dec 10) had limited impact on distributable income. A slight variance in 4Q10 DPU of 1.7Scts vs. our expected 2.0Scts emanated mainly from a later injection of 77 King Street.

• 98.7% occupancy for local portfolio. Occupancy for all local office assets (except MBFC 1) climbed to 100% in 4Q10, driven by a mix of new tenants and expansion by existing tenants. Achieved and asking rents also trended higher. Negative rental reversions should thus be limited in FY11 and be mitigated partly by improved occupancy.

• Lower all-in interest cost of 2.75%. A key positive was the sharp reduction in its all-in cost of borrowing to 2.75%, down from guidance of 3.05% and 3Q10’s 3.4%. After the asset swap, K-REIT expects its asset leverage to climb to 37%, inclusive of S$990m held on its own balance sheet and S$300m at the ORQ level. Debtweighted term to maturity has also increased to 4.2 years from 1.4 years.