KEPPEL REIT
K71U.SI
Keppel REIT - Acquisition Down Under
- Keppel REIT (K-REIT)’s impending acquisition of a 50% stake in a Melbourne office tower under development would provide income stability and strengthen its lease profile upon completion, in our view. However, we expect near-term DPU to take a slight hit from the funding costs associated with the development of the property.
- Upon completion, Australia would account for 15% of K-REIT’s portfolio value and 22.8% of pro-forma income.
- With gearing close to the 40% mark, we expect management to consider all funding options – including a potential equity fund raising to mitigate gearing concerns.
- While we expect the Singapore office sector to bottom out by the end of the year, we believe the positives are already reflected in KREIT's share price.
- Maintain NEUTRAL with unchanged Target Price of SGD0.99.
What’s New
To acquire a 50% stake in a Melbourne office property.
- Keppel REIT (K-REIT) has signed an agreement with Australia Postal Corporation (APC) to acquire a 50% stake in a premium office tower to be developed at 311 Spencer Street, Melbourne, Australia. The aggregate consideration is AUD347.8m (~SGD362.4m). The remaining 50% stake will be held by Cbus Property Pty Ltd, one of Australia’s leading property investors and developers.
- The Grade-A office tower has an estimated NLA of 717,000 sq ft across 42 levels. Construction of the office building is to commence in 3Q17 and is expected to be completed by 4Q19.
Our view
Deal provides income stability with longer WALE.
- Post completion, the office building would be fully leased to the Assistant Treasurer for the State of Victoria on a 30-year net lease. This would then be one of the longest lease tenures under K-REIT’s portfolio, extending K-REIT’s weighted average lease to expiry (WALE) from the current ~6 years to ~9 years (assuming lease commencement from 1 Jan 2016).
- In addition, the property would provide stable income, with expected average rental yield of 6.4% pa over the first 15 years.
- The transaction is yield accretive, with pro-forma (FY16) DPU yield accretion of 1.1% (assuming 100% debt funding). However, near-term DPU is expected to see a dip from the financing costs associated with the development of the building. NAV/unit would marginally dip by 0.7% –to SGD1.42/share.
Increasing Australian exposure.
- Post completion, Australia would account for 15% of assets under management (AUM) (11% at end Dec 2016) and 22.8% of income (18.1% for FY16). The proportion of government tenants in the portfolio would also increase to 16.9%, from the 8% currently.
Potential equity fund raising on the cards?
- Management plans to fund the acquisition via a combination of debt and divestment proceeds from the 77 King Street property (divested Jan 2016). K-REIT would make an initial deposit of ~AUD1.1m, with the balance payment made in subsequent progress payment tranches for the development of the building.
- With K-REIT’s current gearing at 38.4%, a 100% debt funding would increase gearing past the 40% level, and closer to the maximum allowable gearing limit of 45%. We believe management would consider all funding options, including a potential equity fund raising to lower the gearing.
Maintain NEUTRAL with unchanged TP of SGD0.99 (14% downside).
- We make no changes to our earnings estimates pending clarity on the funding requirements and timing of progress payments.
- While we expect the Singapore office sector to bottom out by the end of the year, we believe the positives are already factored in the share price.
- Our Target Price is based on DDM methodology (CoE: 6.7%, TG: 2%).
- Key re-rating catalysts would be a stronger-than-expected rebound in Singapore office Grade-A rents and timely acquisitions/divestments.
Vijay Natarajan
RHB Invest
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http://www.rhbinvest.com.sg/
2017-06-30
RHB Invest
SGX Stock
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