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K-REIT: 17 for 20 rights issue.

Tuesday, October 18, 2011

K-REIT will be seeking approval at an EGM for a rights issue priced at 85c per rights unit. This is to partially fund the purchase of Ocean Financial Centre. Mr. Market does not like this whole deal and sold down the units to a low of 93c this morning.

What do I think? Well, the whole exercise is expected to be DPU accretive which is something investors for income want to see. DPU is expected to increase from 6.37c to 6.72c.

Using the low of 93c per unit this morning, the TERP is 93c x 20 + 85c x 17 /37 = 89.32c.  A pro forma DPU of 6.72c means a distribution yield of 7.52%.

Ocean Financial Centre is currently about 80% occupied. If the REIT manager is able to bump up the occupancy rate, we could see DPU and yield increase further. However, with the current softening office rentals which is likely to get worse, it could be an uphill battle. 

Commitment by the vendor to provide rental support for a period of five years.

Personally, I have a very small position in K-REIT from a long time ago. When I was deciding to invest between K-REIT and Suntec REIT more than two years ago, I chose Suntec REIT for its almost equal exposure to office and retail spaces. I have pared down my investment in Suntec REIT some time ago since, expecting its exposure to office space to be a drag on future performance. In short, I am not feeling sanguine about office space rentals and have not increased exposure to the corresponding REITs.

Having said this, given my very small position in K-REIT, I will most probably subscribe to the rights issue. If I were not invested in the first instance, I would not bother buying in now to gain exposure.

Some important numbers:
Gearing: Increases from 39.8% to 41.6%
All in cost of debt: Decreases from 2.48% to 2.23%
Interest cover ratio: 4.6x to 4.3x

See the slides presentation here.

Related post:
Office S-REITs VS Industrial S-REITs (2).


Anonymous said...

I like the fact that Keppel Land has a 999 year interest in the property but it is only selling the 99 year right to use to K-REIT. Just monetizing a small portion (99 years / 850 years) of the property legal interest for $2.0 bil ! Surprisingly, the sponsor holds a combined 76% stake in the REIT so essentially, they are funding the exercise LOL.

(Not Vested)

AK71 said...

Hi Nick,

I was wondering if you might be the first to comment on this issue. You did not disappoint. ;)

Thanks and keep the comments coming. :)

Vseeker said...

among those "selling" shorter lease out of 999 or freehold lands are Ngee Ann Kongsi and Citydev.

Mandarin hotel (Orchard Rd) is on 99-yrs lease fr NgeeAnn Kongsi - now left only 45-yrs lease now !

Citydev/M&C hotels sold several hotels into CDLHtrusts with only 75yrs lease (wef July2006), most of those hotels (eg. Orchard hotel) actually sitting on freehold titles - which are ofcourse retained by vendors

AK71 said...

Hi Vseeker,

Thanks for sharing this. :)

Touzi said...

>Surprisingly, the sponsor holds a combined 76% stake in the REIT so essentially, they are funding the exercise

Why do they want to do that?

AK71 said...

Hi Touzi,

There is still a 24% free float. ;)

More practically, it would strengthen the balance sheet of the sponsor, selling at a time when commercial property prices are still relatively strong.

Valuation could well go south in the coming months and even years especially if a recession should bite. This is an opportune time for divestment, I believe.

Hwang said...

I still like Suntec, even though it's retail contribution has pared down from 60% to 30% with MBFC purchase. Keeping my fingers crossed.

AK71 said...

Hi Hwang,

As long as you know what you are getting yourself into and are comfortable with the price you paid, there is little reason to worry. :)

Ray said...

Wonderful insights. Enjoy reading your posts even those old ones. Hope u keep them coming for the sake of noobs like me :)

AK71 said...

Hi Ray,

It seems that you really enjoy my blog. Thanks for the encouragement. :)

AK71 said...

"We are seeing quite a lot of new supply coming on stream especially next year, and with the economy broadly heading into a lot of headwinds, as well as companies in oil and gas services sector, in the commodities sector announcing retrenchment or some companies even announcing pullouts from Singapore,” said Mr Ku Swee Yong, CEO of Century 21.

“Actually the demand for office space over the next 12 to 18 months should be pretty weak. I'm not expecting any significant net demand. Then the oncoming supply, especially in 2016, could exacerbate the current vacancy situation. So today's vacancy rate is at about 10 per cent, with eight million square feet of vacant office space across the island ... I think the crunch time will be next year when our vacancy rate will start to exceed the 12 per cent benchmark."

Colliers International added the lack of new demand from banks is the main challenge facing landlords in the CBD. The other is the move by some companies to lower rents by shifting to outlying areas such as Jurong East, where new high-quality office space is available.


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