Growing its Australian portfolio

• 2Q DPU of 1.93cts in line with expectation

• Forward purchase of 8 Chifley Square Sydney will grow DPU by 0.9%/3.4% in FY 11/12

• Maintain Hold and DCF-based TP of $1.32

In line with expectations. 2Q gross revenue and NPI declined by 22.2% to S$18.1m and S$14.3m respectively due to the sale of KTGE Towers but remained relatively stable qoq. The 250% increase in associates’ contribution (one-third stake in MBFC phase 1) lifted distributable income to $26.3m (+19.7%), translating to a DPU of 1.93cts. Operationally, portfolio occupancy remained fairly robust at 98% with Marina Bay Link Mall’s occupancy rising from 87% to 95%.

Forward purchase of 8 Chifley Square, Sydney. Meanwhile, K-reit announced the acquisition of a 50% stake in 8 Chifley Square from Mirvac Group. The prime Grade A office building with NLA of 205,700 sf within Sydney’s prime CBD area, will be completed in 2013. The estimated acquisition price is set at a min of A$154 m to a max of A$169m (S$203m – S$223.3m) based on a 6.65% net yield pegged to a net base rent of A$1,050 psm p.a. The purchase consideration, fully funded by debt at a cost of SOR + 50bps, will be paid in 9 tranches till completion. K-reit is expected to make its down payment of AUD S$ 24.5m (S$32.2m) soon. The subsequent 7 tranches of A$16.3m (cS$21.5 m) will be made on a quarterly basis, commencing on 1 Jan’12. The final payment, upon completion, will be subjected to the actual NPI of the building to incentivise the vendor to maximize operational performance. Meanwhile, the reit will also received income upon each payment.

Downside protection structure. The vendor has undertaken to top up any shortfall for a period of 5 years to the agreed 6.65% yield. We understand that management is currently in talks with 2 major tenants to take-up 70% to 80% of space.

Maintain Hold at an unchanged TP of S$1.32. While the acquisition will benefit K-Reit in the longer term and improve the portfolio quality, initial impact on earnings and valuation is limited in our view. FY11/FY12 DPU accretion from this purchase is estimated at 0.9% to 3.4%, while DCF-backed TP remains unchanged at $1.32. Gearing is estimated to increase to c.42% post-acquisition.

Expanding presence in Australia

• DPU in line; maintain NEUTRAL. K-REIT’s 2Q11 DPU of 1.93 S cts met both our and consensus expectations as it came in at 26% of our full-year forecast, taking 1H11 DPU to 49% of forecast. There were no major surprises. K-REIT also announced the A$154m-170m forward purchase of a 50% interest in 8 Chifley Square in Sydney. The acquisition will be structured to provide a steady 6.65% yield. Fully funded by cheap local debt, the acquisition should be DPU-accretive. But there are risks associated with going overseas and with a rise in aggregate leverage to above 40% on a full debt drawdown for the purchase. Factoring in the acquisition, we raise our FY12-13 DPU estimates by 2-5%. But our DDM-based target price is trimmed from S$1.52 to S$1.49 as we raise our cost of equity to 7.5% to factor in higher overseas exposure. We remain NEUTRAL.

• No surprises from 2Q11 results. 2Q11 distributable income rose 20% yoy as higher contributions from its acquisitions in 2010 and early 2011 more than offset the loss in contributions from Keppel Towers and GE Tower which have been disposed of. Distributable income increased 8% on qoq basis.

• Occupancy of local portfolio remains strong. Occupancy remained full for all local office assets except MBFC (97%) and Prudential Tower (98%). Occupancy of 77 King Street also improved to 88% from 72% in the last quarter. The effects of negative reversions were moderate and were compensated by higher occupancies. Management also continues to see good tenant demand for its office assets.

• Australian property purchase. K-REIT announced the forward purchase of 50% interest in the yet-to-be-completed 8 Chifley Square in Sydney, Australia for A$154m-170m (S$203.0m-223.3m). The deal will be structured to provide a steady 6.65% yield. Fully funded by cheap local debt, the acquisition will be DPU-accretive though we are not excited as it offers fairly similar spreads (against the risk-free rate) as local assets. Also, there are increased risks associated with going overseas and with a rise in aggregate leverage climbing to above 40% on full debt drawdown for the acquisition.

K-Reit Asia’s distributable income up 19.7% in Q2

It will pay up to A$169.8 million for stake in Sydney office building

K-REIT Asia yesterday reported a higher distributable income for the second quarter and said it is buying a stake in an office building in Australia for A$154.4 million (S$203 million) to A$169.8 million.

For the quarter ended June 30, K-Reit’s property income had actually dropped 22.2 per cent over the year to $18.1 million, largely from the sale of Keppel Towers and GE Tower in December last year. Net property income fell 22.2 per cent to $14.3 million.

However, a larger interest income lifted K-Reit’s earnings. It also benefited from a higher share of results of associated companies. This line item brought in $8.3 million – more than three times the $2.4 million last year – from the inclusion of a one-third interest in Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall.

Distributable income to unitholders eventually came up to $26.3 million, up 19.7 per cent over the year. Distribution per unit (DPU) rose 17.7 per cent to 1.93 cents. The annualised DPU in Q2 was 7.74 cents. This works out to a distribution yield of 5.8 per cent, based on K-Reit’s closing unit price of $1.33 as at June 30.

For the half-year, K-Reit’s distributable income to unitholders rose 27 per cent from the previous year to $50.5 million, and its DPU surged 25.3 per cent to 3.72 cents.

K-Reit has been actively growing its portfolio and its latest acquisition is a 50 per cent stake in 8 Chifley Square, bought from a unit of Australia-listed Mirvac Group.

8 Chifley Square is a 30-storey premium grade office building in Sydney’s central business district. It is due for completion in the third quarter of 2013 and will have an estimated 205,700 square feet of net lettable area.

K-Reit will pay A$154.4 million to A$169.8 million, depending on what the committed rental rates are when 8 Chifley Square is completed. The seller will also provide a five-year rental guarantee, if the property is not fully leased at pre-agreed rental rates when it is completed.

K-Reit estimates that the acquisition would have generated an incremental DPU of 0.07 cents – a 1.1 per cent accretion on a pro forma basis for financial year 2010.

On the stock market yesterday, K-Reit closed unchanged at $1.33.

By ANGELA TAN

K-Reit Asia, a real estate investment trust, reported on Thursday that the distribution per unit for the first quarter ended March 31, 2011 rose 34.6 per cent to 1.79 cents compared to 1.33 cents a year ago.

Distribution to unitholders increased by 36.1 per cent to S$24.3 million during the quarter compared to S$17.8 million a year ago.

Property income for the first quarter was S$18.7 million, a marginal increase of S$0.5 million or 2.5 per cent over a year ago, due mainly to higher property income from the two Australian properties and Bugis Junction Towers.

Net property income increased by 7.6 per cent to S$14.9 million in the first quarter as a result of increase in assets under management and lower property expenses.

Its manager expects to achieve its DPU forecast of 6.68 cents for the financial year ending 31 December 2011.

K-Reit Asia is managed by K-Reit Asia Management Limited, a wholly-owned subsidiary of Keppel Land Limited.

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.