Category: KepREIT
K-REIT : UOBKH
Smallest But Purest
Among the office REITs under our coverage, K-REIT Asia (K-REIT) is the smallest in terms of asset size (S$677m). It is, however, a pure office play consisting of four quality office buildings: Prudential Tower (44%), Keppel Towers, GE Tower and Bugis Junction Tower.
Strong rental reversions as key growth driver. With its portfolio consisting of purely prime office assets, K-REIT will benefit from strong rental reversions with its substantial and increasing lease expiries till at least 2010. Lease expiries for 2008-2010 are 14.3%, 24.8% and 27.6% respectively. Committed portfolio occupancy levels have already hit a high of 99.4%. Despite limited upside from occupancy enhancement and little likelihood of any asset-enhancement programmes, we believe upside from rental revisions will drive the stock.
DPU upside from acquisitions. Management has targetted acquisitions of S$2b within the next few years, with initial focus on Singapore because of the great growth potential in the office segment here. In the long term, however, it has a Pan-Asian commercial mandate for its investment portfolio. Its acquisition target of S$2b is achievable for a few reasons: a) K-REIT has been inactive in terms of acquisitions since it was initiated, and b) its parent Keppel Land, whch owns a number of quality office assets, might inject these assets into K-REIT for an assetlight structure.
Initiate coverage with BUY; target price: S$3.39. We initiate coverage of K-REIT with BUY at a target price of S$3.39, implying a 15.9% upside and a total return of 18.4% based on our DCF model. With the recent share price weakness, this is a good opportunity to accumulate the stock. We are conservative on K-REIT’s acquisitions and factor in only about S$150m p.a. in view of risks of delay in its acquisition schedule, in part due to the difficulty of acquiring high-yield assets.
Office REITs – DBS
All-time high for office property. Office asset values continue to heat up, with transacted prices hitting new highs and now past the last peak, driven by property funds active in asset transactions. With the previous high for office assets set by the sale of 7 floors of Prudential Towers by Straits Steamship Land (Keppel Land), a record of S$2,200 psf set in 1996, office capital values have now hit an all-time high with latest sale of 1 Finlayson Green by Hong Leong to UK-based property fund Develica at unit price of S$2,650 psf (S$2,470 assuming full efficiency). This transaction is hot on the heels of the recent sale of Parakou Building at Robinson Road for S$2,013 psf.
Asset revaluation across office REITs set to continue. Along with the latest year-end revaluation, the Singapore office portfolio for S-REITs has been revalued upwards (CCT +10%, Suntec +30%, K-REIT +7.3%, Allco +7%). We expect asset reflation for office S-REITs to continue, with growth in average rents to boost office asset appraisals.
Boom and bane for office Reits. Office REITs are direct beneficiaries of asset reflation from potential upward revaluation based on market comparison of market transactions. However, with the current bullish outlook for Singapore office rentals, price expectations of asset owners have also escalated, compressing physical yields to lower levels (below 3% for the case of the Temasek Tower acquisition by MGPA). Yield accretiveness of acquisitions are reduced, and coupled with strong competition for assets from private property funds with more flexibility and less stringent regulations on investment and access to funds, S-REITs in our view are currently priced out of the market for commercial assets.
Overseas expansion would be a natural course to drive acquisition growth. K-REIT stands out in asset reflation scenario. While we prefer the DCF approach in valuing S-REITs because it takes into account the intrinsic cashflows generation ability of the underlying assets, RNAV approach could also possibly breach the gap, as it factors in asset pricing by market players acquiring assets at capital values pricing in future rental growth prospects. In an asset reflation scenario, K-REIT stands out with potential upside of 93% versus CCT (-2.7%), Suntec (+7.3%) and Allco (+48%). We have BUY recommendation for K-REIT with target price of S$3.70 per unit based on DCF estimates.
Singapore Reits – UBS
Global Equity Research PT adjustments following rise in spot risk free rate
We have moved the spot risk free in our DCF model to 2.9% for yr0-10, from 2.7% following recent interest movements. Our terminal rate (yr10+) is unchanged at 3.6%.
Impact – Downgrade CCT and SUN
Action – Overweight Industrial & Retail
Valuation
K-REIT – UBS
Pure office play with strong organic growth
- Initiate coverage with a Buy 2 rating K-REIT
- DPU CAGR of 18.7% in 2007-12E on office rental reversions
- Possible sponsor acquisitions are not priced into our model
While K-REIT does not have the right of first refusal over Keppel Land s five office assets, we believe Keppel Land is committed to growing K-REIT’s portfolio value to S$2bn over the next few years from the current S$677m.
- Valuation: one-year forward DCF price target of S$3.65
Our DCF valuation is S$3.53 per unit, with our one-year forward DCF-based price target at S$3.65 per unit. At its current price, our estimated 2007 DPU yield for KREIT is 2.8%. Among S-REITs, K-REIT provides the second lowest DPU yield to CapitaRetail China, but the highest DPU CAGR (2007-12E).
K-REIT : DBS
The future growth will come
Leverage on rental growth in secondary locations. We continue to see bullish rental growth with tight vacancy and bullish rentals in the CBD spilling over to secondary locations. We have noted from property brokers that current asking rents for Keppel Towers is now at S$7.80, up by about 40% from S$5.50 within half a year.
1Q07 DPU below expectations,however, evident of lagged recovery. K-REIT delivered 1Q07 DPU of 1.77 cents, with modest growth of 0.6% sequentially compared to 4Q06. This translates into annualised DPU of 7.18 cents and yield of 2.24%, below our expectations. However, with 72% of NLA expected to be renewed from 2007 to 2010 (11% already renewed in 1Q07), we maintain the view that positive rent reversions from Keppel Towers and the remaining portfolio should flow through to distribution income eventually.
Billion dollar deal reflects rents lagging behind capital values. We highlight the recent landmark deal for office transaction with Capitaland unlocking value through the sale of Temasek Tower for S$1.039bn, or S$1,550 psf to Macquarie Global Property Advisors illustrating lagged effect of rental reversions. We understand from market sources that the yield based on the transaction is only about 2%, which implies unit capital values are pricing in strong growth in later years by market players. We find great disparity between our range of RNAV estimate for K-Reit based on i) Income method (FY08 NPI yield, 4.5% cap rate) which derives RNAV of S$2.04 per unit; ii) market comparison methodology (S$2,172 psf for Prudential Tower; S$1,550 psf for KT/GE and Bugis Junction) accordingly derives S$4.57 per unit which is
consistent with this view.
Upgrade to Buy, raising DCF assumptions. With raised rental assumptions for Keppel Towers (44% NPI contribution) and terminal discount proxied by cap rate of 4.5%, we raise our DCF based target price to S$3.70 on the premise that K-REIT’s assets would continue to flush out under-rented space moving forward and rental growth to be reflected by flow through to
distribution income. Upgrade to Buy.