Singapore Reit News

Moody’s affirms K-Reit’s Baa3 rating

Moody’s Investors Service on Monday affirmed the Baa3 corporate family rating of K-REIT Asia (‘K-REIT’). The rating outlook is stable.

The affirmation follows K-REIT’s announcement of a fully-underwritten one-for-one rights offering to raise approximately S$620 million. 81% of the gross proceeds are expected to go towards debt repayment, while the remainder will be used to fund potential acquisitions, asset enhancement initiatives, and working capital needs.

‘Upon completion of the rights issue, K-REIT’s leverage in terms of total debt to assets is expected to decrease from 33% to 9.1%, after taking into account the latest valuation of a 6.3% decline in asset values compared to December 2008. This leverage is strong for K-REIT’s current rating relative to its peers,’ says Kaven Tsang, a Moody’s AVP/Analyst.

‘However, Moody’s believes that this low leverage will not be sustainable if K-REIT is to maintain its long-term financial policy of keeping aggregate leverage at 30% to 40%, while looking for near to medium-term growth opportunities through acquiring new assets,’ says Tsang, adding,

‘However, the size and quality of these potential acquisitions remains unclear for the time being.’

In addition, Moody’s remains cautious over Singapore’s still weak operating environment in the office real estate sector. This is likely to be exacerbated by the substantial supply of new space coming on stream between 4Q2009 and 2013, and could add pressure on already falling office rental rates and result in further asset write-downs. The rights offering will provide K-REIT with ample cushion in its current rating against the challenging operating environment.

The stable outlook is underpinned by the enhanced financial flexibilities and ample headroom stemming from the equity offerings, which position K-REIT’s rating relatively well in the Baa3 level.

Upward rating pressure is likely if K-REIT demonstrates a successful track record in executing its acquisition strategy while maintaining a prudent financial profile.

Downward rating pressure could occur if (1) K-REIT’s business risk profile, operating cash flows, and/or financial metrics weaken, such that EBITDA/Interest coverage stays below 2x and Debt/EBITDA exceeds 9.5-10x on a consistent basis; and/or (2) the company adopts a more aggressive growth policy and tolerates higher leverage to fund new investments.

Moody’s last rating action with regard to K-REIT was taken on 2 September, 2009, when its Baa3 corporate rating was affirmed with stable outlook.

K-Reit DPU to fall after rights issue

NAV per unit as at Dec 31, 2008, would also slide, the trust tells unitholders

K-REIT Asia, which last week announced its one-for-one rights issue, has illustrated the dilutive impact of the issue on the trust’s distribution per unit (DPU) as well as net asset value (NAV) per unit in a circular to unitholders issued over the weekend.

The trust is seeking unitholders’ approval for the rights issue at an extraordinary general meeting (EGM) to be held on Oct 21. At the same EGM, K-Reit’s manager will be seeking unitholders’ nod to supplement the trust deed to facilitate equity fund raisings by providing the manager with greater flexibility on issue size of new units and to fix new unit price, among other things.

Following the rights issue, K-Reit’s DPU for financial year ended Dec 31, 2008 and its NAV per unit as at Dec 31, 2008 would slide about 32 per cent.

The trust’s DPU would fall from 8.91 cents (actual) to 6.08 cents (pro forma, post-rights issue) assuming that the trust’s recently announced acquisition of six floors at Prudential Tower was completed on Jan 1, 2008 and that the proposed rights issue was completed and $501 million borrowings repaid on the same date. The trust’s NAV per unit as at Dec 31 last year would fall from the $2.19 actual figure to a pro forma, post-rights issue figure of $1.49. This assumed the Prudential Tower strata acquisition and an asset revaluation of K-Reit’s portfolio as at Sept 29 this year (which shaved 6.3 per cent off the last valuation as at end-December 2008) were completed on Dec 31, 2008 and that the rights issue was completed and the borrowings repaid also on the same date. K-Reit’s manager is proposing to use about $501 million, or about 80.8 per cent of the rights issue gross proceeds, to repay borrowings.

These comprise a $391 million revolving loan facility used to refinance debt incurred to finance the acquisition of K-Reit’s interest in One Raffles Quay which is maturing in March 2011; and a bridging loan of up to $110 million that will be drawn to finance the purchase of the six floors of Prudential Tower and which is expected to mature in January 2010.

In all, K-Reit is proposing to issue about 666.71 million rights units on an underwritten and renounceable basis to unitholders on a basis of one rights unit for every one existing unit held on the books’ closure date, which is scheduled for 5pm, Oct 27, 2009.

The rights proceeds will raise about $620 million in gross proceeds, translating to about $616 million net proceeds. The proposed issue price of 93 cents per rights unit is at a 21.2 per cent discount to Wednesday’s closing price of $1.18 per unit. The trust announced its rights issue on Wednesday night. The counter was last traded at $1.11 on Friday.

An unexpected move

• Raising $620m in rights issue
• 30-36% DPU dilution
• Downgrade to Fully Valued, TP $1.01

Proposed rights issue. K-reit has proposed to raise $620m through a 1-for-1 rights issue priced at $0.93 each. The price is at a 21.2% discount to the last closing price of $1.18 and 11.8% below the TERP of $1.06. The renounceable issue is fully underwritten by sponsors Keppel Corp, Keppel Land and BNP. An EGM will be held to seek shareholders approval. Proceeds from the issue will be used to repay debt, including the bridging loan for the Prudential Tower strata space purchase (80.8%), fund new acquisitions and AEI at KTGE (18.5%) and issue expenses (0.7%). At the same time, Kreit wrote down the value of its properties by 6.3% to $1970.2m as at Sep 09.

30-36% DPU dilution. Post rights, Kreit’s gearing will fall from 33% to 9.1%, translating to a debt headroom of $438.3-647.8m, assuming target gearing of 30-40%, for new acquisitions. On a post rights basis, adjusting for interest savings, DPU will be diluted by 36% to 6cts in FY09 while FY10 DPU will be adjusted to 6.5cts, after imputing $115m of new acquisitions at 5% return.

Timing of exercise unexpected. We are surprised by the timing of this exercise. While we note that all of Kreit’s debt is maturing around the same period, they are not due till 2011, 18-20 months away. Post the issue, FY09-10 DPU yield is diluted to 5.7-6.1% based on the TERP of $1.06, on the lower end of the 6-8% yield range of comparable peers. Lack of catalyst, with office rents expected to continue on a
downtrend, albeit at a slower pace, would continue to limit share price upside performance. Downgrade to Fully Valued with a DCF-based TP of $1.01 (rights-adjusted $0.95).

K-Reit slides 5.1% after $620m cash call

Nomura sees rights issue lowering cost of capital for any acquisitions ahead

K-REIT Asia’s $620 million cash call on Wednesday night caught the market by surprise, and its units fell as much as 6.8 per cent or eight cents soon after trading began yesterday.

The counter recovered slightly to close at $1.12, 5.1 per cent or six cents down. Some 3.58 million units changed hands.

Most investors and analysts did not see the one-for-one renounceable rights issue coming because K-Reit’s gearing was comparatively lower than its peers’.

After conducting a rights issue in January last year to raise $551.7 million, it had cut its aggregate leverage from 53.9 per cent to 27.6 per cent.

K-Reit’s debt-funded purchase of six strata floors in Prudential Tower would have raised its leverage to 33 per cent, but that would have remained close to the industry’s average gearing level. The rights issue would shave its leverage sharply down to 9.1 per cent.

K-Reit also revealed a 6.3 per cent drop in the value of its assets on Wednesday, from $2.1 billion as at Dec 31 last year to $1.97 billion as at Sept 29.

OCBC Investment Research analyst Foo Sze Ming believes that K-Reit could be taking advantage of the recent rise in its unit price to boost its balance sheet. The counter crossed $1.20 last month, after staying below that level for almost a year.

K-Reit could be preparing to take on Keppel Land’s stake in the Marina Bay Financial Centre (MBFC), he adds. ‘Tower 1 and 2 of MBFC are due to be completed in 2Q 2010 and the divestment of KepLand’s 33.3 per cent stake in this project could come as early in 2Q 2011.’

Nomura Singapore analyst Sai Min Chow views the rights issue positively because it gives K-Reit more debt headroom, lowers the cost of capital for potential acquisitions and improves stock liquidity.

K-Reit said that it could have an additional funding capacity of around $438.3 million to $647.8 million, assuming an aggregate leverage of 30-40 per cent.

But he also estimates a 31-32 per cent dilution in forecasts of K-Reit’s distribution per unit for FY10-11, and a 27 per cent dilution in its book value.