Category: KepREIT
KREIT – UOBKH
Proposed Maiden Acquisition of One Raffles Quay
Proposed maiden acquisition of One Raffles Quay. K-REIT has announced the proposed maiden acquisition of one-third interest in One Raffles Quay for S$941.5m from the its sponsor, Keppel Land’s divestment of the property. It has also entered into a conditional share purchase agreement with Boulevard for the acquisition, who will provide K-REIT with an income support of S$103.4m through 2011 should the financial performance of the property does not meet certain requirements. The acquisition will be funded through equity fund raising whereby Keppel Land will subscribe to the issued new units to maintain its proportionate stake of 40.7% in K-REIT.
One Raffles Quay – Prime office property. One Raffles Quay is one of the largest prime office building with an NLA of 1.3m sf located in the heart of CBD. It comprises of a 50-storey North Tower and a 29-storey South Tower, with an underground link to the Raffles MRT station, a plaza featuring a water fountain, and a sheltered drop-off point and carpark hub with 713 carparking lots. The property also boasts of large banks and financial institutions such as ABN AMRO, Deutsche Bank AG, Ernst & Young and UBS AG as its tenants.
Potential trigger to a series of injections. With the first seen divestment of interest in One Raffles Quay from Keppel Land to K-REIT, we believe this is only the start to a series of potential injections of properties into K-REIT from its parent. The proposed acquisition will also bring K-REIT’s portfolio to S$1.6b from S$677m, a step nearer to meeting its target portfolio of S$2.0b over the next few years.
Maintain BUY, target price at S$3.39. We have previously assumed S$100m-150m of acquisitions p.a in our model, and will be revising our acquisition assumptions to accommodate a more aggressive scenario. Currently, it has a gearing of 28.0%. We re-iterate BUY on K-REIT with a target price of S$3.39. The stock is currently trading at a yield of 2.57%.
KREIT – BT
K-Reit Asia’s Q2 net profit soars 70% to $4.16m
Distribution per unit for the quarter rises 20.9% to 2.14 cents
HELPED by higher rental income, K-Reit Asia’s net profit for the second quarter ended June 30 soared 70.4 per cent to $4.16 million from a proforma $2.44 million in the year-ago period.
This brought the first half’s net profit to $7.61 million, up 55.8 per cent from a proforma $4.88 million for H1 2006. K-Reit, a real estate investment trust for commercial properties, was listed in April last year.
For the first six months this year, K-Reit reported 36.8 per cent higher distributable income of $9.48 million. For Q2, the distribution per unit (DPU) rose 20.9 per cent to 2.14 cents from Q1’s 1.77 cents. The DPU for the first half is 3.91 cents, working out to an annualised 7.88 cents.
K-Reit’s portfolio includes Keppel Towers, GE Tower, Bugis Junction Towers and about 44 per cent of the strata area of Prudential Tower.
In a statement yesterday, the Reit’s manager, K-Reit Asia Management (KAM), said its portfolio’s committed occupancy climbed to 99.6 per cent. It also said that average gross rental rates reached $4.28 per square foot (psf) in June 2007, up from $3.65 psf for the same period in 2006.
Turnover for the quarter was $9.9 million compared with $8 million a year ago. For H1 2007, turnover was $18.7 million – a 17.7 per cent increase.
Net property income improved by 23.3 per cent to $13.75 million for H1 2007. For the quarter, net property income rose 30.4 per cent to $7.28 million.
KAM also said that with 70 per cent of the existing portfolio’s net lettable area due for renewal between 2007 and 2010, K-Reit was in a good position to ‘capitalise on the market upswing’. It added: ‘Strong underlying demand combined with limited quality office space will continue to support high occupancies and rental growth.’
K-Reit’s portfolio is valued at $677 million as at Dec 31, 2006. KAM said it has a target portfolio size of $2 billion over the next few years and the Reit is actively seeking acquisitions of prime commercial properties in Singapore and other other Asian growth cities. K-Reit is also reviewing possible asset enhancement initiatives to add value to the existing portfolio.
KREIT – UOBKH
No Surprises
1H07 net profit up 55.8% yoy, distributable income up 36.8%. K-REIT achieved a good set of results, with its Q2 property income increased 11.1% qoq to S$8.9m. Net profit increased 20.6% qoq to S$4.2m, resulting in a 55.8% yoy increase for the total 1H07 net profit of S$7.6m. The increase in rental income is mainly attributed to improved occupancies, and higher rental rates achieved for new and renewed leases. Property income saw the highest increase for Keppel Towers and GE Tower, of about an addition of S$0.88m over that of 1Q07 (S$3.68m). DPU rose 20.9% from 1.77 Scts in 1Q07 to 2.14 Scts (7.88 Scts on an annualized basis), reflecting a yoy increase of distributable income to S$9.5m in 1H07. Property expenses increased marginally due to higher property tax (consequent to improved occupancies), higher repair and maintenance costs as well as higher management fees.
Rental reversions and rising rental rates still key growth driver. K-REIT is well-positioned to capitalise on the rentals uptrend as it will see almost 70% (by NLA) of its office leases expire and due for renewal between now to end 2010. Blended portfolio occupancy has reached a high of 99.6%, limiting any upside through improvements in occupancy levels. Although management is currently reviewing any possible asset enhancement opportunities, we are cautious on the potential impact.
Earnings surprises from acquisitions. Any earnings surprises will come from acquisitions to hit K-REIT’s target portfolio of S$2.0b over the next few years, although it has not made any maiden acquisitions so far. Key risk, however, is the increasing difficulty in making yield accretive acquisitions, especially in the office segment where capital values and soaring. Having said that, we do not rule out the possibility of Keppel Land injecting its office assets into K-REIT.
Maintain BUY, target price S$3.39. We maintain BUY on K-REIT with a target price of S$3.39.The stock is currently trading at a yield of about 2.86%. In deriving our target price, we adopted DCF valuation using a WACC of 6.04% derived from a market risk premium of 6.5% and beta of 0.7, and a terminal growth rate of 2.0%. We also factored in conservative acquisitions of S$100-150m p.a. over the next few years.
REITs – UOBKH
We compare Singapore REITs (S-REITs) with other Asian REITs to source for its comparative attractiveness.
Falling yield premiums. We observe that yield premiums across Asia has generally fallen. However, as we note that investors are not just looking for yields but also higher capital gains, mentioned in our last ‘Office REITs – Season For Picking’ report, Singapore still looks attractive in terms of risk-returns. Yield premiums of Malaysia REITs (M-REITs) have negated, while that of Japan REITs (J-REITs) looks relatively attractive at 0.96% considering that it is a matured market. S-REITs are currently trading at a yield premium of 0.35%. It is also interesting to note that HK-REITs have a very high average ROE of 10.1% while PB is only 0.95.
S-REITs still look attractive in terms of PB vs ROE. Compared to its Asian REITs market peers S-REITs still looks attractive in terms of its price-to-book vs its ROE, especially so as S-REITs consists of high quality REITs. Amongst the S-REITs, we like CCT (Target price: S$3.72), K-REIT (Target price: S$3.39), and A-REIT (Target price: S$3.13).
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K-REIT – Nomura
– The continued stronger-than-expected recovery in office rentals augurs well for rental reversions and asset revaluations into FY07F. We have upped our DPU forecasts (by 2.9% in FY07F and 11.1% in FY08F) and NAV (to S$3.52/unit from S$3.17/unit) and lift our call to STRONG BUY from Buy.
– Low gearing, asset pipeline underpins acquisitive growth . K-REIT Asia has one of the lowest gearing levels among our universe of REITs, at 0.28x. On our estimates, with gearing of 0.45x, K-REIT could debt fund an additional S$210mn of new acquisitions and increase its assets under management to about S$900mn. As office values rise, sourcing assets will be increasingly difficult. That said, Keppel Land’s office portfolio of 1.3mn sf in Singapore and 0.8mn sf in the rest of Asia provides a substantial pipeline of assets for K-REIT. This pipeline should be augmented by assets owned by parent Keppel Corporation. Certainly the pipeline offers scope for K-REIT to reach its portfolio target size of S$2bn over the next few years”.
– Lease renewal pick-up at strongest point in cycle . The current committed occupancy of the portfolio is 99.4% (end-1Q07), versus 95% in December 2005. Indeed, some 53% of leases (by net lettable area) are being renewed over the three years covering 2007- 09 a period we would consider to be the strongest point in the current office reversionary cycle.
– Brighter prospects for rents and asset values. We have upgraded our outlook for the office market following the significant drop in vacancy in 2006, and strong rental growth in 1Q07. Office vacancy in the Raffles Place precinct has fallen to 3.2% as at 1Q07 (latest figure from JLL), from 3.6% in 4Q06 and 8.6% in 4Q05. According to JLL, Grade A rents in the Raffles precinct increased by 22.9% q-q to S$11.80psf. CBRE estimates that Grade A rents rose by 21.4% q-q to S$10.60psf. We forecast rents will rise by 30.5% in 2007F (versus 15.9% previously) and 15.1% in 2008F (from 11.0% previously) to S$14.51psf. We expect rentals to peak in 1H09, broaching S$14.50psf, given expectations of new supply in 2010-13F.