KREIT – DBSV

Buys more of Prudential Tower

• Raises stake in Prudential Tower to 92.8%

• Strengthens strategic hold but muted near term earnings impact

• Maintain Hold, TP raised to $1.32

Buys a further 48,158sf of Prudential Tower. K-reit is acquiring 4 floors of office space (L26-29) at Prudential Tower, totaling 48,158sf, from 4 separate sellers. The consideration of S$125.1m, which includes S$8.1m income support, works out to be S$2,430psf (without support). The price, when compared to the S$2,300psf paid for the nearby Capital Square, is fair. Strategically, this deal makes sense as it will increase the group’s ownership of the property to 92.8% from 73.4% previously and make it easier for any potential future asset enhancements.

Marginal near term to earnings. The income support is valid for 4 years (till Mar 2015) after completion of the transaction. Based on the proforma income contribution of S$1.3m for FY10, the estimated NPI yield works out to be sub 5%. Given that the purchase will be funded by bank borrowings, the bottomline accretion is a modest 1-2%. See-through gearing will increase to 39% post-acquisition.

Maintain Hold. The deal will benefit K-reit in the long run when the office cycle continues to tick up. We have tweaked our earnings up marginally by 0.4% and 1.5% in FY11F and FY12F respectively, to factor in the additional contributions from the purchase.

Correspondingly, we have raised our DCF-backed TP to S$1.32. K-reit’s share price had pulled back in tandem with the market in the past week and currently offers an 8.1% total return.