Cloudy outlook

K-reits results were in line with expectations, with the effect of positive rental reversions offset by declining occupancy, as weak demand for office space amid rising supply dragged on rental rates and DPU performance. Office concerns have been well documented and share price appears to have largely factored in a deteriorating operating environment. While valuation is inexpensive at implied NPI yield of 6.8% and DPU yield of 12.4%, near term catalyst is lacking. Maintain HOLD with TP of $0.80.

1Q09 results in line. Kreit reported a 29% yoy rise in revenue to $14.8m, lifted by positive rental reversions vs a year ago. NPI and distribution income improved 19% and 38% yoy to $10.8m and $15.7m respectively, as the impact of higher property taxes was offset by reduced interest expense following its rights issue. However, quarterly operating performance was eroded by c9% as higher portfolio rents (+5.9% qoq to $8.06psf vs $7.61 psf in 4Q08) was offset by lower occupation of 95.8%. Both Bugis Junction and Prudential Tower saw take up moderating to 88-92%, and higher costs.

Challenging times. Looking ahead, Kreit’s strategy is to retain tenants and manage cost efficiently amid difficult market conditions. While its portfolio seems fairly resilient with a long WALE of 5.5 yrs and 28% of its leases on LT structures, maintaining occupancy would remain
challenging with new supply coming in over the next 2-3 years. Our assumptions of a 15% vacancy and 50% peak/trough rental declines till 2010/11 translate to an average DPU decline of 3% pa.

No near term visibility. At the current share price, valuation for Kreit is inexpensive with implied NPI yield of 6.8%. However, give the ongoing sector headwinds, we are hard put to find near-term re-rating catalyst and maintain our Hold call with a TP of 0.80.

K-Reit Asia’s Q1 DPU tumbles 48% to 2.38 cents

KEPPEL Land’s listed trust K-Reit Asia says distribution per unit (DPU) fell to 2.38 cents in the first quarter of this year, down 48 per cent from 4.6 cents a year earlier, on an enlarged share base after a rights issue.

K-Reit issued 396.9 million new units – more than doubling the total number of units – in the May 2008 issue.

The fall in DPU was despite a 37 per cent surge in distributable income as the office trust achieved higher rents from new and renewed leases.

Distributable income for Q1 March 31, 2009 rose to $15.7 million, from $11.4 million a year earlier.

Besides better rental income, K-Reit benefited from lower borrowing costs and lower income tax due to a reduction in the tax rate.

Net property income of $10.8 million was 18 per cent higher than $9.1 million in Q1 2008.

The growth was underpinned by higher gross rental income from K-Reit’s properties – Keppel Towers, GE Tower, Prudential Tower and Bugis Junction Towers.

Gross rental income rose 29 per cent year- on-year to $14.5 million.

The trust had borrowings of $577.6 million at end-March. None of the amount is repayable in a year or less.

‘K-Reit Asia remains in a healthy financial position, with low aggregate leverage of 27.6 per cent at end-March 2009,’ the trust said in a statement.

‘It has no immediate refinancing concerns as its existing loans will mature in 2011.’

The trust set up a $1 billion medium-term note programme recently to provide it with greater funding flexibility.

K-Reit Asia acknowledged that the office sector softened in Q1.

Average prime and Grade A monthly rents fell 34.4 per cent and 34 per cent year-on-year to $10.50 per sq ft (psf) and $12.30 psf respectively, according to data from CB Richard Ellis.

But the trust said its portfolio still enjoys positive rental reversions and has a diverse tenant business mix.

Income from its one- third interest in One Raffles Quay also remains sustainable, with income support lasting until end-2011, K-Reit said.

Given the uncertainties ahead, the trust will emphasise tenant retention and is looking to achieve greater operational and cost efficiency.

It will also make selective asset acquisitions should opportunities arise.

K-Reit units lost 0.5 cent to close at 68 cents yesterday.

Results in line

K-reit’s strong performance was expected, boosted by organic growth and ORQ contributions. However, looking ahead, the acceleration in office rental decline would continue to moderate DPU growth outlook. Despite inexpensive valuations of 11.9% FY09 yield, 0.3x P/bk NAV and implied yields of 9.8%, maintain Hold call with TP of $0.80 on the lack of short-term catalyst.

Results within expectations
K-reit reported a 30% rise in Q4 revenue to $14.3m while distributable income rose 152% to $17.4m (DPU: 2.67cts), thanks to contributions from ORQ, positive rental reversions and lower operating expenses. For the full year, the group chalked a 166.7% improvement in distribution income to $58.2m. The group revalued its properties, with a marginal surplus of $7m vs Dec 07 level. Value of Prudential Tower and ORQ saw a small decline of 1-1.5% while KTGE and Bugis Tower experienced a 0-3% hike in value.

Weak office sector outlook
Outlook for the office leasing market remains uncertain. Office rentals have dipped in 4Q08 and are expected to decline further this year. Amongst its buildings, Prudential Tower continued to see its occupancy decline to 92.3% from 96.4% qoq. K-reit has 27% and 26% of its NLA due to renewal/review in FY09 and FY10 respectively, largely from KTGE Towers. While reversions are still positive, the acceleration in rental rate decline would erode DPU growth outlook. Our FY09 projection has factored in a 15% rental dip, accompanied by a 10% drop in vacancy level.

Valuations inexpensive, no short-term catalyst
Current valuations appear to have factored in much of the expected office weakness with implied cap rates of 9.8% vs actual passing yield of 4.1%. However, short-term catalysts are not visible. The stock is trading at FY09 and FY10 DPU yield of 11.9% and 11.7% respectively. While K-reit does not have refinancing concerns and have a relatively long average lease expiry of 5.6years, its low stock liquidity could hamper investor interest.

K-Reit Asia’s Q4 distributable income soars to $17.4m

Net property income up 68% to $11.8m; DPU down due to rights issue last year

KEPPEL Land’s listed office trust, K-Reit Asia, yesterday reported a distributable income to unitholders of $17.4 million for the fourth quarter ended Dec 31, 2008 – a 152 per cent jump from a year ago.

This followed a 68 per cent year-on-year increase in net property income to $11.8 million, due to lower property expenses and higher rental income.

Investment properties held directly by K-Reit achieved an average gross rental rate of $6.08 psf in December last year, compared with $4.65 psf in December 2007.

Despite the higher earnings, K-Reit’s distribution per unit (DPU) in Q4 2008 was 2.67 cents, lower than the 2.8 cents in the same period last year.

This was due to K-Reit’s rights issue in May last year, which added more than 390 million new units to the market.

On an annualised basis, K-Reit’s DPU in Q4 was 10.62 cents, generating a distribution yield of 15.2 per cent based on its unit closing price of 70 cents as at Dec 31, 2008. K-Reit last closed unchanged at 67 cents yesterday.

For FY2008, K-Reit reaped a net property income of $39.7 million, 40 per cent higher than in FY2007. This led to a 167 per cent surge in distributable income to $58.1 million.

DPU for FY2008 was 8.91 cents, marginally higher than the 8.82 cents a year ago. This translates to a distribution yield of 12.73 per cent.

For the period July 1, 2008 to Dec 31, 2008, K-Reit will pay out 5.07 cents per unit on Feb 23 this year. This will bring the total DPU payout to 13.04 cents for the period Jan 1, 2008 to Dec 31, 2008.

Trust manager K-Reit Asia Management sought to reassure investors about K-Reit’s financial strength yesterday. Having raised proceeds of $551.7 million from the rights issue in May 2008, K-Reit has a low aggregate leverage level of 27.6 per cent as at end-December 2008 and has no debt refinancing needs until 2011, said CEO of the trust manager, Tan Swee Yiow.

K-Reit also established a $1 billion multi-currency medium term note programme yesterday as an additional source of funding.

Mr Tan added that it would take a more than 54 per cent drop in K-Reit’s portfolio value for the leverage level to exceed 60 per cent. Under current rules, a Singapore-listed Reit’s aggregate leverage should not exceed 60 per cent of its deposited property if it obtains a credit rating and publicises it.

And while the year ahead could be challenging, K-Reit is still keeping an eye out for selective asset acquisitions across Asia. The Reit will adopt a ‘cautious and prudent’ approach to this, said Mr Tan.