K-REIT – CIMB

Opportunistic placement

KREIT’s capital raising is no surprise as we expected its recent purchase of Old Treasury Building to be 50:50 debt-equity funded. The dilution should be muted at about 1%, given the good pricing and small share issuance.

Adjusting for the timing of the placement vs. our earlier assumption of a more backend loaded placement for Old Treasury Building, we trim our FY13-15 DPU estimates but maintain our DDM-based target price. We reiterate our Neutral call as we see higher headline yields compensating for higher asset leverage and income support.

What Happened

KREIT has announced a small private placement of new units and a sale of existing units by Keppel Corp. The private placement of 40m new units (1.5% of previous unit base) raises S$53.2m while the latter pares down 75m of KepCorp’s units (2.8% of previous unit base). The price for both the placement shares and KepCorp’s sale was S$1.33 per unit, representing a discount of 0.6% to the adjusted VWAP and a 2.3% premium over NAV per share. KREIT intends to use most of the placement proceeds to pare down borrowings.

What We Think

KREIT’s capital raising is not a surprise. We flagged the possibility of capital raising by more REITs in our 7 Feb note “REIT – Equity-raising back in vogue”. Our numbers have also factored in a 50:50 debt-equity funded S$211m acquisition of Old Treasury Building though we expected it to be more backend loaded. The S$53m placement proceeds should cover 50% of the initial payment (50% of purchase price) due in Mar 2013 and keep asset leverage well within 45% even as more payments are drawn down.

The move was probably opportunistic, driven by its share price performance YTD, tight placement pricing and sale-and-purchase agreement with the banker involved. After this placement and recent distribution-in-specie of KREIT’s shares by KepCorp, KREIT’s free float should improve to about 42%, with KepCorp retaining an estimated direct stake of about 15%.

What You Should Do

The dilutive impact is muted at about 0.9% in FY13. We reiterate our Neutral call as we see higher headline yields compensating for higher asset leverage and income support.