K-Reit eyes space in Sydney office tower

K-REIT Asia is set to increase its Australian footprint. The Singapore-listed real estate investment trust is in talks to buy the bulk of the space in a high-profile office tower in Sydney’s CBD area, the Australian Financial Review reported earlier this week.

The tower, 77 King Street, is in on the corner of George Street and houses the landmark glass-box Apple Store. However, the Apple Store is not part of the deal; rather, the office tower and remaining retail space is being sold as a single stratum, Australian Financial Review reported.

Interest in the tower is likely to change hands for more than A$110 million (S$130 million) on an expected city-wide rise in rental and capital values. The total area in the stratum on offer is about 13,500 sq metres. CB Richard Ellis and Savills are brokering the deal.

The tower has been reworked by private investor Victor Comino, who has invested about A$60 million over the past decade in the asset.

AFR reported that a host of offshore bidders expressed interest in the Sydney tower including the Government of Singapore Investment Corporation, Swiss-based AFIAA Foundation for International Real Estate Investments, Hong Kong-based CLSA Asia Pacific Markets unit and German pension fund giant Deka Immobilien Investment.

When contacted, a spokesman for K-Reit Asia Management said: ‘K-Reit Asia is actively on the lookout for suitable pan-Asian acquisition targets, and will make the appropriate announcements if and when such deals materialise.’

The icing on the cake for Singaporean investors looking at the Australian real estate market now is the slide in the Australian dollar, said market watchers.

Earlier this year, K-Reit Asia made its first overseas purchase when it bought a 50 per cent stake in a Grade A commercial building in Brisbane. It paid A$166 million (S$210.4 million at the time) for the stake in 275 George Street from a wholesale fund managed by Charter Hall Group.

That building, which was nearly fully let at the time, comprises nearly 434,000 sq ft of office space over 30 levels and about 15,400 sq ft of retail space.

Prefer Suntec Reit for now

• Initiate with Underperform and DDM-derived target price of S$1.01 (discount rate 7.2%). While we like K-REIT for its pure office exposure, strong financials and pipeline of assets for acquisition, we believe these have largely been priced in. We are concerned about potential DPU declines with the expiry of income support for One Raffles Quay (ORQ) in 2012. Coupled with a lack of details on yield accretion from a potential injection of the first phase of Marina Bay Financial Centre (MBFC), we believe K-REIT could Underperform the market at current valuations and prefer Suntec REIT which offers similar exposure and higher yields.

• Expiry of income support for ORQ in 2012. K-REIT received S$23m in income support in FY09, which contributed 24% to its income in FY09. With most rents at ORQ framed by long leases and locked in at the rates of 2004-05 when rentals were much lower, current review and renewal rates may not be sufficient to allow rental income to catch up with income support following the expiry of the latter. We believe DPUs could in fact fall by 21% yoy in 2012 as a result.

• MBFC injection unlikely to be significantly yield-accretive without income support, due to high costs of debt and/or equity. We believe an injection at current market rates (4.5% NPI yield) may not be yield-accretive, even if we were to assume 100% funding by debt which avoids dilution from equity-funding.

Lifted by Australian income

• 1Q10’s distribution income up 14% yoy, in line

• Stronger 2H earnings fuelled by Australian contributions

• Upgrade to Hold with TP of $1.17

Lifted by Australian contributions. Kreit reported a set of in-line results. Distribution income rose 14% yoy to $17.8m (DPU: 1.33cts) on a 23% yoy improvement in revenue to $18.2m.

However, on a qoq basis, topline rose by a modest 7% thanks to the maiden $1.4m profit (1 month) from its Australian acquisition, completed in Mar 2010. In terms of its Spore assets, the group achieved a slight increase in occupancy to 96% while average portfolio passing rents inched up 1.3% qoq to $8.30psf/mth. Gearing remains healthy at 25.2%.

Earnings growth to be back-end loaded. Going forward, with the better than expected economic growth prospects, we view that office rents have reached a low and are likely to hover at the bottom until more of the new stock is digested. We expect K-reit’s earnings to be stronger in 2Q10 with the full impact of the Australian contributions as well as an expected reduction in withholding taxes in Australia from July this year. Furthermore, with majority of renewals and rent reviews due this year largely completed, the impact of negative reversions is likely to be felt from next year when 15.5% of its leases expire and another 10% due for review.

Upgrade to Hold. We have upgraded Kreit to Hold on the back of our more upbeat view on the office sector given the improved GDP performance. However, in terms of earnings, we have nudged FY10-11 DPU down by 5.5% and 2.9% respectively to account for changes in the non-tax deductible items, to adjust for the change in management fee payment mode from 100% units to 50/50 cash and units. K-reit’s share price had retraced from the recent peak and is currently trading at FY10/11 DPU yields of 6.1%/5.8% and 0.76x P/bk NAV. Our DCF-backed target price of $1.17 translates to an absolute return of 9%.

K-Reit Asia’s results lifted by acquisitions

Net property income up 28% to $13.9m in Q1; distribution per unit at 1.33 cts

RECENT acquisitions have boosted K-Reit Asia’s financial results for the first quarter ended March 31, 2010.

K-Reit yesterday posted a net property income of $13.9 million – 28 per cent higher than a year ago. The trust received more rental income from the six strata floors in Prudential Tower which it bought late last year, and from the 50 per cent stake in 275 George Street in Brisbane which it purchased early this year.

As a result, distributable income to unitholders rose. It was $17.8 million in Q1, up 14 per cent from the same period last year.

Distribution per unit (DPU) in Q1 was 1.33 cents, or 5.39 cents on an annualised basis. The annualised distribution yield is 4.9 per cent based on K-Reit’s closing unit price of $1.10 on March 31.

DPU in Q1 fell 44 per cent from the 2.38 cents a year ago as the unit base expanded from a $620 million rights issue in November. Adjusting for the cash call, DPU in Q1 2009 would have been 1.18 cents, leading to a year-on-year growth of 13 per cent.

Several performance indicators for K-Reit have improved in the past year. Its portfolio occupancy rate as at end-March was 96 per cent, up slightly from 95.8 per cent year-on-year. The average gross rental rate rose to $8.30 from $8.06 over the same period.

K-Reit’s leverage ratio dropped to 25.2 per cent at end-March from 27.7 per cent a quarter ago. It will fall further to 15.2 per cent this month when the trust uses some proceeds from the rights issue to partially repay a revolving term loan.

K-Reit’s portfolio size as at end-March was $2.3 billion, up from $2.1 billion as at end-December last year due to acquisitions. The trust is eyeing further growth as business sentiments improve and the office sector stabilises.

K-Reit said in its financial statement that it ‘intends to pursue opportunities for strategic acquisitions in Singapore and across Asia’. It will also identify potential asset enhancement initiatives for its properties.

The counter lost two cents yesterday to close at $1.13.