KREIT – DBS

2Q08 led by positive rental reversion

Story: K-reit 2Q08 revenue grew 32% yoy to $13m while NPI rose a more modest 26% yoy to $9.2m as expense ratio increased to 29%. On a qoq basis, NPI was flat despite 13% higher revenue due to greater marketing and leasing costs. Distributable income of $14.2m was almost 2.7x over the previous period and 29% higher qoq with the added associate income from ORQ. There was no revaluation exercise carried out on the properties during the period.

Point: The improved operating performance was due to positive rental reversion from its office portfolio, largely at Keppel and GE Tower as average passing rents rose to $7.37psf/mth from $6.86psf/mth in Q1. Looking ahead, we believe DPU growth will continue to derive from positive rental renewals as new leases are re-contracted at levels which are higher (but growing at a more modest pace than before) vs expiring rates. It has a total of 36.3% of NLA to be renewed over the next 2 years. In addition, refinancing concerns have abated. The group has obtained a new loan of $391m from Keppel Corp, maturing in Mar 2011. When completed by Sep 08, K-reit’s debt maturity profile would be extended to 2.5 years. Cost of debt is estimated at 3.94% and will raise current overall cost of debt of 2.66% to close to 4% when exercised. With a debt/asset ratio of c28%, K-reit is also well placed to tap acquisition opportunities.

Relevance: We have revised our FY08 and FY09 DPU estimates to 9.9cts and 8.6cts to adjust for dilution from the rights issue units. The stock is currently offering 6.1- 7.1% yield over the next 2 years and is trading at 0.62x of FY09 BV. Maintain Buy with a price target of $1.61.