Category: KepREIT
K-REIT – BT
K-Reit ups Prudential Tower stake
It buys four office floors comprising 48,158 sq ft for a total of $125.1m
OFFICE landlord K-Reit Asia will buy four strata office floors in Prudential Tower for $125.1 million, boosting its stake in the building to 92.8 per cent, it said yesterday.
The four floors total 48,158 sq ft and represent 19.4 per cent of the strata value of the building. K-Reit Asia, a unit of Keppel Land, currently owns 73.4 per cent of the strata value of the building.
The trust will buy level 26 from Innisvale Investments; level 27 from Maraha; level 28 from Lima Bintang Holdings; and level 29 from Mirabeau Gardens.
Post-acquisition, it will own a total of 223,830 sq ft of Grade A net lettable area office space at Prudential Tower, which is located at the junction of Church Street and Cecil Street. The committed leases in the property have a weighted average lease expiry of 3.6 years, the trust said.
Under the sale and purchase agreement, the vendors have agreed to provide rental support, subject to a maximum sum of $8.09 million for the period commencing from the date of completion of the acquisition until March 31, 2015.
The acquisition is expected to be immediately accretive to K-Reit Asia’s distribution per unit. Post-acquisition, more than 90 per cent of the trust’s Singapore portfolio will be located in the prime areas of Raffles Place and Marina Bay, said Ng Hsueh Ling, chief executive of the trust’s manager.
‘It (the acquisition) reinforces K-Reit Asia’s strategy to be a leading landlord in Singapore’s key business and financial districts,’ Ms Ng said.
The acquisition will be funded entirely by debt and when completed, will increase K-Reit’s aggregate leverage ratio marginally from 37 per cent to about 39 per cent.
K-Reit Asia units gained 4 cents or 3.2 per cent to close at $1.29 yesterday.
Office REITs – OCBC
Common Themes of FY10 results; Maintain OVERWEIGHT
Negative rental reversion bottoming out. After FY10 results, we found a few common themes in the guidance given by Office REITs managers. Firstly, most Office REITs with Grade-A office assets expect negative rental reversions to bottom out by end 2011. In FY10, negative rental reversions were still prevalent in some Grade-A properties such as Six Battery Road and One George Street. One Raffles Quay and Suntec City1 also saw YoY declines in gross revenue contribution, but this is expected to turn around in 2011-2012. According to CBRE, Grade-A rents averaged S$9.90 psf/month in 4Q10, reflecting an increase of 10% QoQ and 22.2% YoY. Grade-A rents bottomed at S$8 psf/month in 1Q10 and have since risen some 23.8%. We see room for more rental upside ahead and forecast Grade-A rents to hit S$10.50 psf./month in 2011, more than S$11 psf/month in 2012 and above S$12 psf/month in 2013. However, non-Grade-A properties will see more gradual recovery, where they will bottom out possibly only after 2012-2013.
Hollowing-out concerns a passé. Most Office REITs hold the view that earlier concerns of the “hollowing-out effect”, as the vacated space is readily being taken up by existing tenants wanting to expand or occupiers from other buildings. This is corroborated by CRBE findings which reported that that Grade-A vacancy dipped to 2.7% in 4Q10 from 2.8% in 3Q10 and a notable turnaround from 6.2% in 4Q09, despite the new supply including MBFC Tower 1 in 1Q10 and MBFC Tower 2 in 3Q10.
40% leverage is the new norm. On the back of the low interest rate environment and mega acquisitions completed in 2010 (MBFC Phase 1), we are seeing more Office REITs shoring up their aggregate leverage ratios, with Suntec leading the pack with 40.4% on end-Dec 2010 from 33% on end-Sep 2010. K-REIT’s gearing also increased from 15.1% to 37%, while FCOT’s leverage remains flat at 39.8%. With the exception of CCT2 which had pared down its debt in 4Q10, most of the Office REITs seem comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the 40% will be the new norm for FY2011. Debt headroom of S$1.18b in for the local Office REITs subsector indicates that sizeable debt-funded acquisitions are still possible.
Valuations. The four local Office-REITs, namely CCT [BUY, FV: S$1.61], Suntec [HOLD, FV: S$1.60], K-REIT [NOT RATED] and FCOT [BUY, FV: S$0.90] trade at an averageprice-to-book of 0.81x, which compares favourably to the broader S-REIT sector of 0.93x. We remain upbeat on the office sector recovery; and maintain OVERWEIGHT for the local Office REITs subsector.
K-REIT – CIMB
Stronger office outlook
• Broadly in line; upgrade to Neutral from Underperform. 4Q10 DPU of 1.7Scts broadly met our expectations and consensus, accounting for 26% of our FY10 forecast. FY10 DPU of 6.4scts forms 96% of our estimate. 4Q10 results were marked by a sharper-than-expected reduction in all-in interest costs. Management is optimistic on forward office rentals and occupancy. Factoring in reduced interest costs and higher occupancy, we raise our FY11-12 DPU estimates by 1-4% and introduce FY13 estimates. Accordingly, our DDM-based target price climbs from S$1.43 to S$1.50 (discount rate 7.2%). Upgrade to Neutral on a stronger outlook and continued compression of physical yields in the office space. Re-rating catalysts could come from stronger-than-expected rental reversions, we believe.
• 4Q10 distributable income grew 19% yoy. K-REIT completed an asset swap of Marina Bay Financial Centre Phase One (MBFC 1) and KTGE Tower and the acquisition of 77 King Street in Australia in Dec 10. 4Q10 distributable income grew 19% yoy, on contributions from its Australian acquisitions as the asset swap (completed in mid-Dec 10) had limited impact on distributable income. A slight variance in 4Q10 DPU of 1.7Scts vs. our expected 2.0Scts emanated mainly from a later injection of 77 King Street.
• 98.7% occupancy for local portfolio. Occupancy for all local office assets (except MBFC 1) climbed to 100% in 4Q10, driven by a mix of new tenants and expansion by existing tenants. Achieved and asking rents also trended higher. Negative rental reversions should thus be limited in FY11 and be mitigated partly by improved occupancy.
• Lower all-in interest cost of 2.75%. A key positive was the sharp reduction in its all-in cost of borrowing to 2.75%, down from guidance of 3.05% and 3Q10’s 3.4%. After the asset swap, K-REIT expects its asset leverage to climb to 37%, inclusive of S$990m held on its own balance sheet and S$300m at the ORQ level. Debtweighted term to maturity has also increased to 4.2 years from 1.4 years.
K-REIT – DBSV
Acquisition-led growth
• FY10 earnings lifted by new acquisitions
• Robust earnings visibility, addressing earnings growth
• Maintain Hold with TP of $1.24
Achieved 4Q10 DPU of 1.7cts. Kreit reported a marginal 2% qoq drop in revenue to S$21.4m in Q4 from sale of KTGE Towers. However, NPI remained flat at S$17.5m, inclusive of a small marginal impact from MBFC1 and 77 king St in Australia as these acquisitions were completed in the latter part of Dec. Contributions from these assets helped to offset the income vacuum from sale of KTGE Towers. Lower financing costs of 2.75% (vs 3.4% in Q3) helped boost distribution income by 2% to S$23.2m, translating to a DPU of 1.71Scts. The group also took in a revaluation surplus of S$32m, lifting book NAV to $1.48. Overall occupancy rate remained robust at 97%
Long WALE provides income visibility, addressing earnings growth via strategic acquisitions. Looking ahead, Kreit will continue to benefit from the improved office leasing market. Its weighted average lease to expiry of 7.65 years provides good income visibility. However, near term renewals of 7% of NLA this year, largely from Prudential Tower and Bugis Junction, with another 8% of leases due for rent review, could limit short-term organic rental growth. In addition, the anticipated expiry of income support from ORQ by end FY11/early FY12 could mean moderated earnings growth. As such, we expect the group to remain on the lookout for strategic accretive pan-Asian acquisition opportunities. Gearing as at end Dec 2010 stands at 37%.
Maintain Hold. Although we see limited earnings upside, the improving office rental market and capital value cycle is likely to benefit the group’s underlying asset value in the medium term. This will underpin Kreit’s valuation and share price. Maintain Hold with a DCF-backed TP of S$1.24.
K-REIT – BT
K-Reit results in Q4 boosted by acquisitions
Distributable income surges 19% to $23.2 million
K-REIT Asia yesterday posted improved results for the fourth quarter ended Dec 31, 2010, as acquisitions boosted earnings.
Property income for the office real estate investment trust was $21.4 million in Q4, up 26 per cent from a year ago.
This was largely due to contributions from six strata floors at Prudential Tower which K-Reit bought in November 2009, as well as contributions from a 50 per cent stake in 275 George Street in Australia which the Reit purchased in March last year.
As a result, net property income rose 30 per cent over the same period to $17.5 million.
Distributable income to unitholders went up 19 per cent to $23.2 million. This translated to a distribution per unit of 1.71 cents, which is 18 per cent higher year-on-year.
For the full year ended Dec 31, K-Reit’s net property income was $67.3 million, rising 38 per cent from the previous year.
This pushed distributable income to unitholders up 21 per cent to $85.6 million. The DPU was 6.37 cents, up 21 per cent.
Based on K-Reit’s closing unit price of $1.41 at Dec 31, the distribution yield for the year would be 4.5 per cent.
The counter ended trading at $1.44 yesterday, unchanged from the previous day.
The commercial property market has picked up as the economy recovered. K-Reit, citing figures from CB Richard Ellis, noted that Grade A offices commanded an average monthly rent of $9.90 per square foot (psf) in December last year, up from $8.10 a year ago.
Nevertheless, office rents are still below the heights reached in the boom years before the financial crisis. This has led to concerns that office landlords could be hit by negative rental reversions when leases expire this year.
According to K-Reit, average monthly rents across its portfolio in Singapore range from $8 to $9.40 per square foot. It expects rental renewals this year to be within this range.
The office leasing market is vibrant, with tenants committing to leases more quickly and rents rising considerably, said Ng Hsueh Ling, CEO of K-Reit’s manager, at a briefing yesterday.
The occupancy rate for K-Reit’s entire portfolio was 97 per cent as at Dec 31, dropping from 99.2 per cent a quarter ago. The dip happened partly as the portfolio grew to include the office tower at 77 King Street, which was 76.7 per cent leased.
K-Reit’s aggregate leverage at Dec 31 was 37 per cent. The Reit is comfortable with this level, Ms Ng said.