K-REIT – DBS
Yield provides support
• Slightly above expectation
• Positive reversion more than offset higher vacancy
• Outlook stabilizing, visibility remains poor
• Raising forecast, maintain Hold with TP $0.95
Results ahead of estimates. Kreit reported an 18% yoy rise (+4% qoq) in topline to $15.4m. NPI grew 34% yoy and 14% qoq to $12.3m while distribution income improved 23% yoy to $17.5m. DPU of 2.64cts works out to an annualized yield of 10%. No revaluation exercise was carried out in 1H09.
Higher rentals filled vacancy slack. The modest sequential rise in topline was the result of positive rental reversions being offset by higher vacancy level of 94.9% (-0.9% pt qoq). Average portfolio rents were $8.13psf vs $7.37psf a year ago. The higher jump in NPI was due to the impact of lower property tax, reduced marketing and utilities costs. Outlook for the office rental market has stabilized, however, visibility remains poor with demand remaining subdued this year. With asking rents ranging between $7-9psf (excl ORQ), we expect negative rental reversion to kick in next year. Kreit has a remaining 8% and 26% of NLA to be renewed/reviewed in 2H09 and 2010 respectively.
Valuation undemanding but lacks near term catalyst. At 0.46x P/bk NAV and implied office values of $995psf, Kreit’s valuation is undemanding. Portfolio resilience through its long weighted lease to expiry of 5.4 yrs provides stability in income base. However, we are hard put to find re-rating catalysts in the near term. We have raised FY09 and FY10 DPU to 9.4cts and 9.1cts respectively to reflect a slightly better than projected occupancy level vs our earlier assumption of 90%. This translates to yields of 10-9%. Maintain Hold with TP of $0.95.
K-REIT – BT
K-Reit Asia’s Q2 distributable income rises 23%
OFFICE trust K-Reit Asia yesterday said that distributable income for the second quarter ended June 30 rose 23.4 per cent to $17.5 million from $14.2 million a year ago on the back of higher rental rates for new and renewed leases.
Distribution per unit (DPU) rose to 2.64 cents from 2.18 cents.
The trust, which is a unit of Keppel Land, also reported a 34.2 per cent rise in net property income to $12.3 million, from Q2 2008’s $9.2 million.
K-Reit’s portfolio – which includes Bugis Junction Towers and a one-third stake in One Raffles Quay – attained 94.9 per cent committed occupancy by the end of June. This is a drop from the 99 per cent occupancy the trust reported at the end of 2008. But income went up even as occupancy dipped slightly as rents climbed. The portfolio’s average gross rental rate was $8.13 per square foot in June this year as compared with $7.37 psf in June 2008.
For the quarter, the all-in interest rate was 4.25 per cent, as compared with 2.64 per cent for Q2 2008. The aggregate leverage remained the same at 27.6 per cent on June 30 and March 31 this year, and the weighted average term to expiry of debt was reduced from 2.0 years in March to 1.8 years in June.
K-Reit said that the pace of decline for office rents eased in Q2 and the office leasing market is more active. However, it expects demand for office space to remain subdued in 2009. But despite this, K-Reit ‘is well positioned with its high-quality asset portfolio, strong tenancy profile and diverse tenant business mix’, the trust said.
Based on committed leases at the end of June, K-Reit’s gross rental income for FY2009 already exceeds that for FY2008, the trust pointed out in a statement. The weighted average lease term to expiry for the trust’s portfolio is 5.4 years while that of its top 10 tenants is 7.1 years. This provides stable rental income, the trust said.
Going forward, K-Reit’s manager will continue to place emphasis on tenant retention and seek to improve operational and cost efficiencies. K-Reit will also make selective asset acquisitions should opportunities arise, it said.
K-Reit gained 2 cents, or 1.9 per cent, to close at $1.05 yesterday.
A-REIT – DBS
A-reit delivers again
• 3.62 Scts DPU, higher than expectations
• Portfolio occupancy levels likely to remain stable
• Maintain BUY, TP S$1.73 based on DCF- total return of 18%, backed by a stable 8% dividend
yield
1Q10 results ahead of projections. Distributable income grew by 18% to S$61m, (DPU of 3.62 Scts) ahead of projections, largely due to a better than expected operational performance. A stronger than expected net property income margin of 79% and portfolio occupancy of 97% vs projections of 92% were the main factors.
Pre-possessing an asset – 13 International Business Park. A-reit repossessed the property, as the anchor tenant was unable to fulfill lease obligations. Limited impact on earnings as (i) the property accounts for c1% of topline, (ii) it is backed by an 8-month security deposit, and (iii) A-reit has since released c37% of the space at higher rates and is in advance negotiations for another 18%.
Adjusting occupancy assumptions upwards. Having concluded 1/3 of expiring leases for the year, A-reit has exceeded expectations by keeping portfolio occupancy relatively stable at 97% and with only a slight moderation in occupancy for its multi-tenanted buildings (MTB) portfolio (down 1pct to 94%). Looking ahead, with only c9.4% of its income up for renewal for the remaining FY10, and backed by recovering economic outlook, we expect forward rental renewal negotiations to improve. As such, we raise our occupancy assumptions for MTB properties from 85% to 90%, leading to higher DPU estimate of 12.8 SCts-13.0 Scts.
Maintain BUY, TP adjusted to S$1.73 based on DCF. We favor A-reit for its ability to deliver sustained positive returns to unitholders. Current price translates to an attractive FY10-
11F yield of c8%.
A-REIT – DMG
A Good Start
1QFY10 results above expectations. A-REIT reported a 6.9% YoY fall (+12.1% QoQ) in 1Q10 DPU to 3.62¢, above ours and consensus estimates. Annualised DPU came in at 14.48¢, 8.8% above our FY10 forecast of 13.3¢ (10.5% above the Street’s 13.1¢ estimates). Revenue was up 10.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-1Q10 distribution on 29 Jul 2009. We have raised our DDM-backed target price to S$1.72 (S$1.57 previously) to reflect a lower cost-of-equity assumption of 9% (9.7% previously). Maintain BUY.
Earnings resilience expected despite increasing tenants in arrears. Our recent channel checks on A-REIT suggest more industrial tenants in arrears in rental payments given the recessionary economic conditions. Management confirmed that about 1% of its NLA (~ S$3m annual revenue) is highly vulnerable to full-fledged default. In any case, A-REIT has already received S$2.1m in security deposits from these tenants. On a portfolio basis, A-REIT is backed by 6 months of security deposits, mitigating downside DPU risks. While earnings impact may be muted, we believe the loss of a single major tenant may be fairly damaging to the perception of A-REIT’s stable of assets.
Occupancy at healthy levels. Reflecting the slowdown in global demand, occupancy rate for A-REIT’s multi-tenanted properties declined marginally to 94.0% from 95.3%. However, overall portfolio occupancy remains high at 97.1% (97.8% in 4QFY09) due to the contribution from single tenanted buildings with long term leases. We expect positive rental reversion, albeit at a slower pace, for the Business & Science Parks and Hi-Tech Industrial properties as these properties are 30% under-rented.
Trading at attractive yields. At current prices, A-REIT offers investors a stable dividend yield of 8.5% for FY10 and 8.7% for FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. We recommend buy on dips as stock has rallied 48% since Mar 09.
A-REIT – CIMB
Stable performance
• Meeting expectations in the first quarter. A-REIT’s 1Q10 results met consensus and our expectations. Net property income of S$80.7m (+15.8% yoy) and distributable income of S$61.0m (+17.9% yoy) was reported, with growth attributed mainly to an enlarged portfolio base of 89 properties vs 86 properties one year ago. DPU declined 7% yoy to 3.62cts, due to increased number of units after its rights issue. DPU for the first quarter forms 28% of our forecast of 12.8cts for FY10.
• Occupancy down marginally, but reversions holding up. Portfolio occupancy was down 70bp qoq to 97.1% as at end-Jun. This was mainly attributed to a decline in the occupancy rate for its multi-tenanted properties which came down to 94.0% from 95.3% a quarter ago. A-REIT’s Business and Science Park segment and Hi- Tech segment continued to have positive reversions, although at a slower pace, as rents of expiring leases remain significantly below market rental rates. After renewing 689,115sf of net lettable area (NLA) in 1Q10, A-REIT is left with 9.4% of its gross revenue due for renewal for the rest of the financial year, down from 14.1% due at the beginning of the financial year.
• Tenant risk updates. A-REIT estimates that about 129,167sf (0.6% of total NLA) of NLA accounting for S$0.14m (0.4% of total monthly revenue) of gross revenue is occupied by tenants that are considered vulnerable. However this risk is mitigated by S$1.08m of security deposits held by A-REIT. In the quarter, 88,330sf of space accounted for 0.64% of A-REIT’s gross revenue from 13 International Business Park has been reposed as the master tenant, LabOne, was unable to fulfil its lease obligations. A-REIT has 8 months of security deposit which will be used to pay rent due while the space is being marketed. 36.9% of the space has since been leased at rates not lower than the existing rate and another 16.8% of space is in active negotiation with a prospective tenant.
• Maintain Neutral at unchanged target price of S$1.68 (discount 8.5%). We expect occupancy levels to continue to weaken due to the uncertain outlook of industrial indicators. However, increased contributions of AREIT’s built-to-suit development projects completing over FY10 and built-in rental growth for its leaseback arrangements will moderate the decline in revenue.