K-REIT good start for the year, but near term catalysts limited

TP of S$1.12.


Quick Comment
• Revenue is in line with expectations. K-reit reported a 91% y-o-y (+60.1% q-o-q) rise in NPI to S$28.5m supported by a 96% y-oy (92% q-o-q) increase in revenue to S$36.6m. The increase was largely boosted by an enlarged portfolio, including the additional four floors of strata office space at Prudential Tower, a 50% interest in 8 Chifley Square and an c.87.5% interest in OFC.

• DPU made up 25.7% of our full year estimates. Meanwhile, higher contribution from an associate (one-third share in MBFC Phase 1) and a lower interest cost of
2.03% (vs 2.35% in Q3) helped lifted distributable income to S$48.5m translating to a DPU of 1.9cts. Quarterly distribution will be made from 3Q12 instead of on a half yearly basis.

Our Views
• Portfolio occupancies moving up, rental remained flat. Portfolio occupancy continued to move up progressively on the back of healthy leasing demand, especially from small-to medium-size companies across all sectors. Occupancy rose from 94.1% a quarter ago to 96.1% with c.50,000 sf of new leases tied at OFC. Meanwhile, rent remained flat with OFC signing rents at S$11-13 psf -- no change compared to a quarter ago.

• Prudent capital management to mitigate high gearing risk. While K-reit’s gearing of 41.8% is higher than its peers, we like the trust‘s proactive efforts in mitigating refinancing risk, including early negotiations to refinance its $535m loan due at the end of the year. The trust is likely to refinance the loan with a 5-year term which would help to extend its debt expiry profile from the current 2.9 years to 4.0 years when concluded.

Recommendation
• Limited catalysts in sight, maintain HOLD at an unchanged TP $1.12. While we like K-reit for its high quality portfolio, we see limited near-term catalysts. Its portfolio is running at almost full capacity, while the remaining leases that are expiring this year, while small (c.0.3% of the portfolio's NLA), are likely to see some negative rental reversions. Therefore, we maintain our HOLD call at an unchanged TP of S$1.12.