K-Reit may buy stake in MBFC

K-REIT Asia is looking to add to its portfolio and may take a stake in the upcoming Marina Bay Financial Centre (MBFC).

The commercial real estate investment trust said this yesterday after releasing its results. Net property income was $13.4 million for the fourth quarter ended Dec 31, 2009 – up 13.8 per cent from a year ago.

Earnings were lifted by positive rental revisions and contributions from newly purchased strata floors in Prudential Tower. Distributable income to unitholders also rose, by 11.4 per cent to $19.4 million.

However, distribution per unit (DPU) fell as the unit base grew from a $620 million rights issue in November last year. DPU in Q4 was 1.45 cents, down 45.7 per cent from 2.67 cents a year ago. Adjusting for the rights issue, DPU in Q4 last year would have been 1.32 cents, reflecting a 9.8 per cent increase.

K-Reit will pay out 2.77 cents per unit on Feb 25, for July 1 to Dec 31.

At a press briefing, K-Reit manager CEO Ng Hsueh Ling said that the trust is actively looking at acquisition opportunities. She told BT that a stake in MBFC held by its parent Keppel Land is under consideration. This confirms what several analysts have been deducing in the past few months.

The Reit has not struck a deal because the first phase of MBFC is still on its way to completion. ‘We will only look at it when there is greater stability of income,’ Ms Ng said.

And because a deal between K-Reit and Keppel Land would be an interested party transaction, both sides will have to work on getting the ‘right and best value’ for their investors, she added.

K-Reit has considerable capacity for acquisitions because of the rights issue. As at end-December, its aggregate leverage was 27.7 per cent, almost the same as that a year ago. This could drop to 9.1 per cent should it pay off a loan due to Kephinance Investment.

Its debt headroom would be about $438-648 million, assuming an aggregate leverage of 30-40 per cent.

K-Reit’s portfolio value stood at $2.1 billion as at Dec 31, which works out to an average of $1,616 per sq ft (psf). This is 5.3 per cent lower than a year ago.

The portfolio occupancy rate slipped to 95 per cent from 99 per cent over the same period. On a brighter note, the average portfolio rent in December last year inched up to $8.16 psf.

For FY2009, K-Reit’s net property income grew 23.3 per cent to $48.9 million. Distributable income to unitholders also increased 21.1 per cent to $70.5 million.

Annualised DPU was 5.28 cents – 40.7 per cent less than the 8.91 cents a year ago. The annualised distribution yield would be 4.8 per cent based on K-Reit’s closing unit price of $1.10 as at Dec 31.

Annualised DPU would have risen 19.7 per cent year-on-year if the FY2008 figure was adjusted for the rights issue to 4.41 cents.

K-Reit units gained two cents yesterday to close at $1.20.

K-Reit posts 18% rise in Q3 distributable income

Net property income up 29% over Q308; trust eyes more local, regional acquisitions

OFFICE trust K-Reit Asia said yesterday that its third-quarter distributable income rose 18 per cent on the back of positive rental reversions.

Distributable income for the three months ended Sept 30 rose to $18 million, from $15.2 million a year ago. Distribution per unit (DPU) accordingly rose to 2.69 cents from 2.34 cents.

The trust, which is a unit of Keppel Land, also reported a 29 per cent rise in net property income to $12.3 million, from Q3 2008’s $9.5 million.

K-Reit’s portfolio – which includes Bugis Junction Towers and a one- third stake in One Raffles Quay – attained 94.9 per cent committed occupancy as at end-September; the trust reported the same occupancy rate at end-June.

The average gross rental rate for K-Reit’s portfolio was $7.91 per square foot (psf) in September, down slightly from $8.13 psf in September 2008.

Looking ahead, the trust said that it was well positioned to capitalise on economic stabilisation due to its ‘high-quality asset portfolio, strong tenancy profile and broad tenant diversity’.

K-Reit also pointed out that, based on committed leases as at end-September, gross rental income for FY2009 already exceeds that for FY2008.

K-Reit on Sept 30 proposed a one-for-one rights issue to raise $620 million. The stock fell since most investors and analysts were taken by surprise as K-Reit’s gearing was already comparatively lower than its peers’. The company had also conducted a rights issue in January 2008 to raise $551.7 million, which had cut its aggregate leverage then. Upon completion of the latest rights issue exercise, K-Reit’s aggregate leverage is expected to decrease from 33 per cent to 9.1 per cent.

The trust also did a revaluation of its portfolio as part of the proposed rights issue, and saw its portfolio value fall from $2.1 billion at the end of December 2008 to $1.97 billion at the end of September 2009.

‘Going forward, with the added financial flexibility upon completion of the proposed rights issue, the manager intends to pursue opportunities for strategic acquisitions in Singapore and across Asia,’ K-Reit said in its statement yesterday. ‘The manager will also continue to focus on tenant retention, attract new tenants and seek to manage K-Reit Asia’s assets and operating cost structure more efficiently.’

K-Reit shares closed unchanged at $1.12 yesterday.

Moody’s affirms K-Reit’s Baa3 rating

Moody’s Investors Service on Monday affirmed the Baa3 corporate family rating of K-REIT Asia (‘K-REIT’). The rating outlook is stable.

The affirmation follows K-REIT’s announcement of a fully-underwritten one-for-one rights offering to raise approximately S$620 million. 81% of the gross proceeds are expected to go towards debt repayment, while the remainder will be used to fund potential acquisitions, asset enhancement initiatives, and working capital needs.

‘Upon completion of the rights issue, K-REIT’s leverage in terms of total debt to assets is expected to decrease from 33% to 9.1%, after taking into account the latest valuation of a 6.3% decline in asset values compared to December 2008. This leverage is strong for K-REIT’s current rating relative to its peers,’ says Kaven Tsang, a Moody’s AVP/Analyst.

‘However, Moody’s believes that this low leverage will not be sustainable if K-REIT is to maintain its long-term financial policy of keeping aggregate leverage at 30% to 40%, while looking for near to medium-term growth opportunities through acquiring new assets,’ says Tsang, adding,

‘However, the size and quality of these potential acquisitions remains unclear for the time being.’

In addition, Moody’s remains cautious over Singapore’s still weak operating environment in the office real estate sector. This is likely to be exacerbated by the substantial supply of new space coming on stream between 4Q2009 and 2013, and could add pressure on already falling office rental rates and result in further asset write-downs. The rights offering will provide K-REIT with ample cushion in its current rating against the challenging operating environment.

The stable outlook is underpinned by the enhanced financial flexibilities and ample headroom stemming from the equity offerings, which position K-REIT’s rating relatively well in the Baa3 level.

Upward rating pressure is likely if K-REIT demonstrates a successful track record in executing its acquisition strategy while maintaining a prudent financial profile.

Downward rating pressure could occur if (1) K-REIT’s business risk profile, operating cash flows, and/or financial metrics weaken, such that EBITDA/Interest coverage stays below 2x and Debt/EBITDA exceeds 9.5-10x on a consistent basis; and/or (2) the company adopts a more aggressive growth policy and tolerates higher leverage to fund new investments.

Moody’s last rating action with regard to K-REIT was taken on 2 September, 2009, when its Baa3 corporate rating was affirmed with stable outlook.

K-Reit DPU to fall after rights issue

NAV per unit as at Dec 31, 2008, would also slide, the trust tells unitholders

K-REIT Asia, which last week announced its one-for-one rights issue, has illustrated the dilutive impact of the issue on the trust’s distribution per unit (DPU) as well as net asset value (NAV) per unit in a circular to unitholders issued over the weekend.

The trust is seeking unitholders’ approval for the rights issue at an extraordinary general meeting (EGM) to be held on Oct 21. At the same EGM, K-Reit’s manager will be seeking unitholders’ nod to supplement the trust deed to facilitate equity fund raisings by providing the manager with greater flexibility on issue size of new units and to fix new unit price, among other things.

Following the rights issue, K-Reit’s DPU for financial year ended Dec 31, 2008 and its NAV per unit as at Dec 31, 2008 would slide about 32 per cent.

The trust’s DPU would fall from 8.91 cents (actual) to 6.08 cents (pro forma, post-rights issue) assuming that the trust’s recently announced acquisition of six floors at Prudential Tower was completed on Jan 1, 2008 and that the proposed rights issue was completed and $501 million borrowings repaid on the same date. The trust’s NAV per unit as at Dec 31 last year would fall from the $2.19 actual figure to a pro forma, post-rights issue figure of $1.49. This assumed the Prudential Tower strata acquisition and an asset revaluation of K-Reit’s portfolio as at Sept 29 this year (which shaved 6.3 per cent off the last valuation as at end-December 2008) were completed on Dec 31, 2008 and that the rights issue was completed and the borrowings repaid also on the same date. K-Reit’s manager is proposing to use about $501 million, or about 80.8 per cent of the rights issue gross proceeds, to repay borrowings.

These comprise a $391 million revolving loan facility used to refinance debt incurred to finance the acquisition of K-Reit’s interest in One Raffles Quay which is maturing in March 2011; and a bridging loan of up to $110 million that will be drawn to finance the purchase of the six floors of Prudential Tower and which is expected to mature in January 2010.

In all, K-Reit is proposing to issue about 666.71 million rights units on an underwritten and renounceable basis to unitholders on a basis of one rights unit for every one existing unit held on the books’ closure date, which is scheduled for 5pm, Oct 27, 2009.

The rights proceeds will raise about $620 million in gross proceeds, translating to about $616 million net proceeds. The proposed issue price of 93 cents per rights unit is at a 21.2 per cent discount to Wednesday’s closing price of $1.18 per unit. The trust announced its rights issue on Wednesday night. The counter was last traded at $1.11 on Friday.

An unexpected move

• Raising $620m in rights issue
• 30-36% DPU dilution
• Downgrade to Fully Valued, TP $1.01

Proposed rights issue. K-reit has proposed to raise $620m through a 1-for-1 rights issue priced at $0.93 each. The price is at a 21.2% discount to the last closing price of $1.18 and 11.8% below the TERP of $1.06. The renounceable issue is fully underwritten by sponsors Keppel Corp, Keppel Land and BNP. An EGM will be held to seek shareholders approval. Proceeds from the issue will be used to repay debt, including the bridging loan for the Prudential Tower strata space purchase (80.8%), fund new acquisitions and AEI at KTGE (18.5%) and issue expenses (0.7%). At the same time, Kreit wrote down the value of its properties by 6.3% to $1970.2m as at Sep 09.

30-36% DPU dilution. Post rights, Kreit’s gearing will fall from 33% to 9.1%, translating to a debt headroom of $438.3-647.8m, assuming target gearing of 30-40%, for new acquisitions. On a post rights basis, adjusting for interest savings, DPU will be diluted by 36% to 6cts in FY09 while FY10 DPU will be adjusted to 6.5cts, after imputing $115m of new acquisitions at 5% return.

Timing of exercise unexpected. We are surprised by the timing of this exercise. While we note that all of Kreit’s debt is maturing around the same period, they are not due till 2011, 18-20 months away. Post the issue, FY09-10 DPU yield is diluted to 5.7-6.1% based on the TERP of $1.06, on the lower end of the 6-8% yield range of comparable peers. Lack of catalyst, with office rents expected to continue on a
downtrend, albeit at a slower pace, would continue to limit share price upside performance. Downgrade to Fully Valued with a DCF-based TP of $1.01 (rights-adjusted $0.95).