K-Reit to distribute 8.91 cts per unit for FY08

K-Reit on Monday reported income distributable to unitholders of $17.4 million for the quarter to Dec 31, bringing full year distribution to $58.2 million, or 8.91 cents per unit.

This implies a full-year yield of 12.7 per cent, one percentage point above 2007, and 18.3 per cent above forecast DPU of 7.3 cents, or 10.8 per cent.

Net asset value per unit was $2.28 at Dec 31, compared to $3.78 a year ago. Adjusted NAV, excluding distributable income was $2.19, down from $3.69 a year ago.

K-Reit said the outlook remained ‘challenging’ but that there were mitigating factors. Its average portfolio rents are below market rents ‘and will provide a cushion for positive rental reversion even under current conditions.’

It said that average lease to expiry was 5.6 years in its portfolio, and that it has no debt financing needs until 2011. Leverage was at 27.6 per cent as at Dec 31.

K-Reit said the present climate provided opportunities for selective asset acquisitions, and said it will engage in asset enhancement to optimise net lettable area and improve operational efficiency.

Pricing in cloudy sector outlook

Story: K-REIT reported a 34% y-o-y jump in 3Q08 revenue to S$13.9m, led by higher rental rates and occupancies. However, NPI grew by a lower 27% to S$9.5m due to an increase in expense ratio to 31.2% arising from higher property taxes. Distributable income grew 35% to S$15.2m, translating into 2.34cts DPU.

Point: The better performance was the result of organic growth from positive rental reversion, as well as inclusion of contributions from ORQ. Its portfolio occupancy remained strong at 99.4%, while office rents were stable in the quarter. An estimated 1.5% of portfolio NLA was renewed during the quarter, and the lag effect between new and previous rates boosted average rents by 0.8% qo-q to S$7.43psf/mth. Looking ahead, anticipated slower economic growth and the worsening global financial crisis will dampen demand for office space and rental growth.

Coupled with an increasing supply of new office space coming onstream over the next two years, rental rates and capital values are likely to soften. This will likely moderate DPU growth going forward. Meanwhile, refinancing concerns have abated after K-REIT managed to secure a revolving loan facility that extended its loan maturity profile to 1H2011.

Relevance: Like other office REITs, K-REIT’s share price tumbled amid concerns over the office sector. Current valuations are inexpensive at 10.6% FY09F DPU yield and implied asset value of S$870psf vs its Dec 07 valuation of S$1,707psf. However, it lacks a near-term catalyst given anticipated negative newsflow on the office sector. Our RNAV of $1.16 has factored in a 35% decline in office rents over this cycle. Maintain Hold recommendation with a price target of S$0.93, based on 20% discount to RNAV.

K-REIT Asia Achieves Higher YTD September 2008 Distribution Per Unit

• Distributable Income increases by 173.8% year-on-year and outperforms forecast by 13.6% due to strong rental reversions and additional contribution from One Raffles Quay.
• Net property income increases by 31.1% year-on-year to $27.8 million.
• Portfolio achieves 99.4% committed occupancy as at 30 September 2008.

2Q08 led by positive rental reversion

Story: K-reit 2Q08 revenue grew 32% yoy to $13m while NPI rose a more modest 26% yoy to $9.2m as expense ratio increased to 29%. On a qoq basis, NPI was flat despite 13% higher revenue due to greater marketing and leasing costs. Distributable income of $14.2m was almost 2.7x over the previous period and 29% higher qoq with the added associate income from ORQ. There was no revaluation exercise carried out on the properties during the period.

Point: The improved operating performance was due to positive rental reversion from its office portfolio, largely at Keppel and GE Tower as average passing rents rose to $7.37psf/mth from $6.86psf/mth in Q1. Looking ahead, we believe DPU growth will continue to derive from positive rental renewals as new leases are re-contracted at levels which are higher (but growing at a more modest pace than before) vs expiring rates. It has a total of 36.3% of NLA to be renewed over the next 2 years. In addition, refinancing concerns have abated. The group has obtained a new loan of $391m from Keppel Corp, maturing in Mar 2011. When completed by Sep 08, K-reit’s debt maturity profile would be extended to 2.5 years. Cost of debt is estimated at 3.94% and will raise current overall cost of debt of 2.66% to close to 4% when exercised. With a debt/asset ratio of c28%, K-reit is also well placed to tap acquisition opportunities.

Relevance: We have revised our FY08 and FY09 DPU estimates to 9.9cts and 8.6cts to adjust for dilution from the rights issue units. The stock is currently offering 6.1- 7.1% yield over the next 2 years and is trading at 0.62x of FY09 BV. Maintain Buy with a price target of $1.61.

K-Reit’s distributable income up 173% to $14.2m in Q2

K-REIT Asia said yesterday its second-quarter distributable income rose 173 per cent to $14.2 million, from $5.2 million a year ago.

better showing was mainly due to income from its one-third stake in One Raffles Quay, which was absent in Q2 2007. Distribution per unit rose 1.9 per cent to 2.18 cents, from 2.14 cents in Q2 2007.

Net property income for the three months ended June 30, 2008 rose 26 per cent to $9.2 million, from $7.3 million the year before.

K-Reit also saw better rental income, with higher rents achieved for new and renewed leases, as well as improved occupancy. The average gross rental rate for investment property held directly by K-Reit rose to $5.66 per sq ft in June 2008, from $4.28 psf a year earlier.

For the first half of 2008, distributable income rose 169.8 per cent to $25.6 million, from $9.5 million in 2007. DPU for the first six months of the year rose 0.8 per cent to 3.94 cents, from 3.91 cents in 2007.

The trust also reduced its leverage to 27.7 per cent at June 30, 2008, from 53.9 per cent at Dec 31, 2007. Based on a 60 per cent aggregate leverage limit, this provides K-Reit with an additional debt headroom of $680 million to fund acquisitions and for working capital. Based on K-Reit’s existing portfolio, there will be no debt re-financing requirement until 2011, the trust said.

For the longer term, the trust’s manager is establishing a medium-term note programme to allow the Reit to swiftly tap the debt capital market.

K-Reit is upbeat about its prospects, even though the global economy is slowing. Some 35.4 per cent of its tenants are from the banking, insurance and financial services sectors. Most of these tenants have lease terms of six years or more, and ‘provide very stable income going forward’, said Tan Swee Yiow, chief executive of the trust’s manager.

Mr Tan pointed out that despite the weaker external environment, Singapore’s office rents rose slightly in Q2 2008, reflecting the tight supply of space.

‘Office rents will be supported by continued demand for prime office space as Singapore transforms itself into a global city and with spin-off multiplier effects from the two integrated resorts currently under construction,’ K-Reit said in a filing to the Singapore Exchange.

K-Reit’s stock closed unchanged at $1.40 yesterday. The stock has shed 29.6 per cent since the start of the year.