K-Reit’s free-float falls below 25% after rights issue

But number of free-float units more than doubles

K-REIT Asia’s free float of units will fall to 24.9 per cent from 27.1 per cent following the subscription by the Keppel Group for rights units not taken up by minority shareholders.

The trust’s rights issue of 396.9 million units priced at $1.39 per unit – which was 96.3 per cent subscribed, inclusive of excess rights applications – became fully subscribed after Keppel Corp and Keppel Land mopped up 14.9 million rights units, or 3.7 per cent of the issue, not taken up by minority shareholders.

While the free-float percentage will decline following the rights issue, the absolute number of free-float units will more than double from 67.7 million units to 161.2 million units.

Of the 14.9 million units, Keppel Corp took up 6.3 million units and Keppel Land 8.6 million units in line with their undertakings.

The rights issue will leave Keppel Land with 43.6 per cent of K-Reit’s enlarged equity base of 647.2 million units, and Keppel Corp will control 31.5 per cent. Prior to the rights issue, Keppel Land held 42.6 per cent of K-Reit’s total 250.2 million units, while Keppel Corp had 30.3 per cent.

K-Reit’s rights issue, which closed on April 25, will raise gross proceeds of about $551.7 million that will partly refinance the $942 million bridging loan K-Reit has taken from Keppel Corp to finance the trust’s acquisition of a one-third interest in One Raffles Quay. K-Reit bought the stake in One Raffles Quay from Keppel Land last year.

The $941.5 million acquisition price for the new Grade A office development works out to $2,109 per square foot (psf) of net lettable area. Stripping out income support of up to $103.4 million provided by seller Keppel Land through 2011 to K-Reit Asia reflects a lower net purchase price of $1,877 psf.

In a release yesterday, K-Reit said that based on gross proceeds of about $551.7 million from the rights issue, the trust’s aggregate leverage will be reduced from 53.9 per cent to 27.7 per cent and create for K-Reit about $679.8 million funding capacity based on 60 per cent leverage limit.

In late March, the trust manager’s CEO, Tan Swee Yiow, said in an interview with BT that management will look at a variety of options, including convertible bonds, commercial mortgage-backed securities and straight debt, to raise balance funds needed to repay the bridging loan.

K-Reit said yesterday the rights units will be listed on the Singapore Exchange from 9am on May 8. On the stock market yesterday, K-Reit ended six cents lower at $1.44.

Gearing reduced after completion of rights issue

K-REIT received valid acceptances for a total of 382m rights units representing take-up rate of 96.3% at the close of the rights issue on 25 Apr 08. Keppel Corporation (6.3m) and Keppel Land (8.6m) has taken up the remaining 14.9m rights units that had not been subscribed in accordance with their irrevocable undertaking. Gross proceeds of S$551.7m from the rights issue will be utilised to refinance bridging loan taken for the acquisition of One Raffles Quay. Management estimated that this would reduce gearing from 53.9% to 27.7%.

Keppel Corporation will have an interest in 486m units or 75.1% stake in K-REIT, inclusive of units with Keppel Land. Keppel Land owns 282.23 units or 43.6% stake. The free float will be 24.9% after the rights issue. Liquidity should improve as free float has increase from 67.7m shares to 161.2m shares. Market capitalisation has grown to S$932m using yesterday’s closing price of S$1.44.

The rights units will start trading on Thursday, 8 May 08.

K-Reit Q1 distributable income soars 165.9%

This was attributed mainly to income from its stake in One Raffles Quay

K-REIT Asia has reported distributable income of $11.4 million for the quarter ended March 31, a 165.9 per cent increase from the same period in 2007.

This was attributed mainly to income from its one-third interest in One Raffles Quay Pte Ltd, the acquisition of which was completed on Dec 10, 2007.

K-Reit said the contribution from One Raffles Quay was $10.9 million, comprising income support received from the vendor, interest income and dividend income.

Distribution per unit (DPU) for the quarter was 4.6 cents, or 1.3 percentage points more than forecast. K-Reit said this amount will be included in the advance distribution payout, estimated to be 6.45 to 6.5 cents per unit, for the period Jan 1 to May 7, 2008.

Net property income for the quarter was $9.1 million, or 41.5 per cent higher than $6.5 million in the corresponding quarter in 2007. This was underpinned by higher gross rental income from properties, K-Reit said. Gross rental income increased 30.2 per cent year on year to $11.2 million in Q1 2008.

Committed occupancy of K-Reit’s portfolio is 99.6 per cent. With the contribution of the one-third interest in One Raffles Quay, the average monthly gross rent of its portfolio grew 69.4 per cent year on year and 14 per cent from end-2007 to $6.86 per square foot in March 2008.

K-Reit is now engaged in a rights issue. The expected gross proceeds of $551.7 million will be used to partly repay a bridging loan of $942 million drawn down for the acquisition of the one-third stake in One Raffles Quay.

This will reduce K-Reit’s aggregate leverage from 53.9 per cent to 27.7 per cent and provide it with additional funding capacity to acquire further properties.

The rights units are expected to be issued on May 8.

K-Reit said it expects to benefit from positive rental revisions, given its current rents are below market rates and that 42.2 per cent and 20.2 per cent of its portfolio’s net lettable area is due for lease expiry and rent review respectively between 2008 and 2010.

K-Reit’s units closed one cent higher at $1.41 yesterday.

1QFY08: Positive rental reversion kicking in

K-REIT reported gross revenue of S$11.2m in 1QFY08, an increase of 29.8% yoy. Distributable income surged 165.9% yoy to S$11.4m. K-REIT announced DPU of 4.60 cents for 1QFY08, an increase of 159.9% yoy. The results were substantially better than our expectations as interest expense for bridging loan from Kephinance Investment (estimated at 2.4% compared to our assumption of 3.5%), a subsidiary of Keppel Corporation, was lower than expected.

Revenue contribution from existing properties Prudential Tower, Keppel Towers & GE Tower and Bugis Junction Towers increased 42.8%, 63.4% and 13.6% yoy respectively. The acquisition of One Raffles Quay (ORQ) was completed on 10 Dec 07. Average gross rent increased 14% qoq to S$6.86 due positive rental reversion from existing properties and full quarter contribution from ORQ. The one-third interest in ORQ provided total income of S$10.9m, including income support of S$6.1m. Committed occupancy was 99.6% at Mar 08.

Benefiting from positive rent reversions. K-REIT is well positioned to ride the upswing in office rentals with 24.2% of net lettable area (NLA) due for expiry and another 15.5% of NLA due for rent review in 2008 and 2009 when supply of office space in Central Business District is limited. Current asking price is S$15 to S$18psf pm for Prudential Tower and above S$10psf pm for Bugis Junction Towers, Keppel Towers and GE Tower. Average portfolio gross rental was only S$4.65psf pm (excluding contribution from ORQ) in 4Q07. There is significant room for leases to be renewed at higher rates. Rentals for Grade A office space within Raffles Pace gained a further 5.3% qoq to S$17.52psf pm in 1Q08.

Rights issue strengthen equity base. K-REIT Asia has proposed 8-for-5 renounceable rights issue at S$1.39 per unit. Keppel Corporation and sponsor Keppel Land, who own 72.7% of K-REIT in aggregate, have given irrevocable undertaking to take up their respective allocations of rights units. K-REIT will raise gross proceeds of S$551.7m, which will be utilised to repay bridging loan from Kephinance Investment. K-REIT will seek refinancing for the balance of bridging loan of S$391.3m due in Sep 08 with long-term debt. Gearing will be reduced from 53.9% to 27.7% after completion of the rights issue. Book NAV will be reduced from S$3.78 to S$2.26 per share.

K-REIT provides attractive FY08 distribution yield of 8.84%. We have assumed that the balance of bridging loan from Kephinance Investment is refinanced at steeper interest rate of 4.2%. Our target price is thus reduced to S$1.81, taking into account dilution from the rights issue.