Keppel REIT - CGS-CIMB Research 2018-11-30: Partially Unlocking Value In Ocean Financial Centre

KEPPEL REIT (SGX:K71U)

Keppel REIT - Partially Unlocking Value In Ocean Financial Centre

Keppel REIT has announced it is selling a 20% stake in Ocean Financial Centre (OFC) to Allianz Real Estate for S$537.3m.

Post sale, Keppel REIT will retain a 79.9% stake.
Ocean Financial Centre is a premium Grade A office building located at Raffles Place with 877,635 sq ft of net lettable area. The sale is expected to complete in Dec 18.

The sale price of S$537.3m (for 20% stake) is 2.3% above the independent valuation of S$525.3m and 16.8% above its acquisition price of S$460.2m. On a psf basis, the deal works out to be c.S$3,061psf and translates into a stabilised historical annualised FY18 NPI yield of c.3.1%.
Post sale, Keppel REIT’s proforma book NAV could be lifted by c.1.4%. In addition to partially unlocking value in its asset, we think the transaction will focus investor attention on the robustness of its underlying NAV.

Keppel REIT will recognise an accounting gain of S$11.9m and a net-of-transaction-cost gain of S$6.9m from the sale. Proceeds from the sale will enhance Keppel REIT's financial flexibility, including helping it to pare down debt.
Depending on the final amount of debt repaid, management indicated that gearing could be reduced by 3.2% pts compared to the 39.1% as at 3Q18.
After the sale, the income vacuum (net of interest savings) could lower proforma DPU by 2.6%.

We see this deal as a mild positive for Keppel REIT. We leave our earnings and DDM-based Target Price of S$1.34 unchanged for now and maintain our ADD rating.
Upside risks include a faster-than-expected office rental recovery while downside risks include a slowdown in economic activity, which could impact appetite for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-30

SGX Stock Analyst Report ADD MAINTAIN ADD 1.340 SAME 1.340