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).