K-REIT – CIMB

Spectacular leasing!

K-REIT braved headwinds tolease out more than 50,000 sf of space at Ocean Financial Tower and Prudential Tower in 1Q12. Backed by attractive yields of 8% and improving office indicators, we think its risk-reward now favours a positioning for a bottom.

1Q12 DPU was slightly above our estimate and consensus on lower interest costs, at 27% of FY12. We raise DPU by 2-4% and DDM target price (disc. rate: 8.2%) on lower interest costs and higher occupancy. Upgrade to Outperform from Neutral.

Interest cost-savings

1Q12 distributable profit doubled yoy with the help of contributions from the acquisition of OFC and an additional stake in Prudential Tower. The quarter’s outperformance was led by lower interest costs though contributions from increased occupancy should flow in soon. Lower rates on construction loans accounted for the lower interest costs.

Spectacular leasing

Indicators increasingly point to a trough. In 1Q12, K-REIT braved office headwinds to lease out more than 50k sf of office space, taking occupancy at OFC from 85% to 91%. After two quiet quarters, Prudential Tower’s occupancy climbed from 94% to 98%. Signing rents were fairly in line with market rates at S$11-13psf for OFC and S$8-9 psf for Prudential Tower. Take-up was skewed to new tenants with a mix of new-to-market legal firms at OFC and some fund-management firms at Prudential.

Upgrade to Outperform

With portfolio occupancy at a higher 96.3% and lease expiries/ reviews at a low 0.3%/1.6% of NLA, we think downside is limited. Higher aggregate leverage is also likely less of a concern now that capital values are expected to remain buoyed by low interest rates. Trading at forward yields of 8%, we think its risk-reward favours a positioning for a bottom. Potential catalysts include improved take-up and rents at OFC.