K-REIT Asia - Sell: Outlook Remains Challenging

Reported 2Q DPU of 2.64 cents — Together with the 1Q DPU of 2.38 cents, 1H09 DPU amounted to 5.0 cents and was some 12% higher than our and consensus estimates on an annualized basis. Despite revenue rising just 18.2% yoy and 4% qoq, NPI managed to register a commendable improvement of 34% yoy and 14% qoq on the back of lower expenses. In particular, 1H09 marketing expenses were some $0.4m lower than 1H08.

Occupancy showing signs of stabilizing — While portfolio occupancy continues to fall on a quarterly basis (from 95.8% to 94.4%), it appears to be stabilizing. Both Prudential Tower and Bugis Junction saw their occupancy unchanged from a quarter earlier, while ORQ remains fully occupied. Only Keppel and GE Towers reported a fall in occupancy (from 95.9% to 93.3%).

Revise estimates by 2-5% — We revise our DPU estimates by 2-5% on betterthan-expected results and lower property expenses. Our TP is raised slightly to 55 cents. However, we expect 2H09 to remain challenging.

Sell: Cautious on office sector — According to Jones Lang LaSalle, as at 2Q09, pre-commitments for future supply are as follows – 10E: New Construction: 2.2m sq ft, 51% pre-committed; 11E: New Construction: 2.3m sq ft, only 1% pre-committed. JLL estimates some 0.8m sq ft of shadow space, including precommitted space in the market. With passing rentals currently at $8.13psf, we expect negative reversion to hit in 2010, where 20% of the space leased will expire. We expect prime grade A rentals to drop to $5psf. YTD’09, the stock has also outperformed the REITs sector by 15%.

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