K-REIT – DBSV

Resilient earnings

• Results in line; 6M DPU is 52% of our FY12 forecast

• Stable rents backed by improving occupancy rates

• Proactive refinancing efforts will mitigate gearing risk

• Maintain BUY; TP is adjusted to S$1.23

Highlights

Results in line. K-REIT’s NPI and gross revenues more than doubled to S$31.3m and S$39.3m, respectively, led by its 88% stake in Ocean Financial Centre (OFC) and improving occupancy rates at all properties. Meanwhile, the income vacuum left by the expiry of One Raffles Quay’s (ORQ) was partly mitigated by the GST rebates and positive rental reversions. Distributable income was S$49.8m or 1.94cts DPU (+86.5% y-o-y, +2.1% q-o-q).

Our View

Improved occupancy, stable rents. Although the Eurozone crisis has created uncertainties in the global economic climate, KREIT’s portfolio continued to demonstrate resilience by outperforming the general office market. Occupancy is now 97% with improvement at all its properties, while leases that were renewed in the quarter saw positive rental reversions. Meanwhile, OFC signing rents continued to hold up at S$11-13 psf supported by higher occupancy of 93% vs 91% a quarter ago. In Sydney, Apple has taken up additional space at 77 King Street, lifting occupancy by 5 ppt to 93% On track to renew S$598m loan. Gearing has risen to 43.9% following the acquisition of 12.4% stake in OFC, but the trust is on track to refinance its S$598m loan due at the end of the year with a 5-year term loan. This should mitigate refinancing risk and extend its debt expiry profile from 2.5 years to 3.6 years.

Recommendation

Maintain BUY; nudged up DCK-backed TP to S$1.23. The longweighted lease expiry of 6.2 years with 48.2% of its portfolio NLA tied to long leases (> 5 years) will help to mitigate leasing risk. Meanwhile, 2H earnings will continue to improve led by rising portfolio occupancy, the additional stake in OFC, and the tax savings from MBFC Phase 1 which was obtained recently. We raised FY12/13 DPU forecast by 1-3% and TP by 1.6% to account for better-than-expected portfolio occupancy. The stock now offers close to 20% total return.