Keppel REIT - CGS-CIMB Research 2020-09-14: Expanding Into Sydney Metropolitan Office

KEPPEL REIT (SGX:K71U)

Keppel REIT - Expanding Into Sydney Metropolitan Office

Keppel REIT (SGX:K71U) has entered into an agreement to acquire a 100% stake in Pinnacle Office Park for A$306m. The property comprises three freehold Grade A office buildings located within Macquarie Park, a key metropolitan office park in Sydney. See Keppel REIT Announcements.
The property is well-located, near the Macquarie Park Metro Station and a major bus interchange, and is well served by major arterial roads that provide direct links to the Central Business District. There is also redevelopment opportunity for one of the three buildings in the medium term.
The property has a total NLA of 35,132 sqm and has a 96.3% committed occupancy as at Jun 2020, with a weighted average lease expiry (WALE) of 4.8 years.
Key tenants include Aristocrat Technologies, Konica Minolta and Coles Supermarkets. Existing leases have fixed annual rental escalations of 3-4% p.a. The transaction is expected to be completed in 4Q20F.

The acquisition enhances the resilience of Keppel REIT’s portfolio and complements the existing CBD-focused portfolio with the addition of metropolitan office space. Post-acquisition, Keppel REIT’s AUM is expected to increase to S$8.2bn, of which 23% are located overseas – in Australia and Seoul.
Portfolio WALE is also lengthened to 6.9 years. In addition, the partial redevelopment opportunity will likely enable Keppel REIT to improve returns from the property in the medium term, in our view.
Management indicated that the purchase will be fully funded with an A$-denominated loan and is expected to raise gearing to 38.7%. At a net yield of 5.25%, inclusive of a A$2.1m income guarantee, the transaction is expected to be DPU- accretive.

In addition, Keppel REIT announced in Sep 2020 that it will be issuing S$150m 3.15% subordinated perpetual securities. According to management, proceeds from the new issuance will be used to refinance its existing perpetual securities expiring on 2 Nov 2020. The latter has a higher coupon of 4.98%. We estimate this is likely to result in c.S$2.7m in interest savings annually for Keppel REIT or c.1.5% of FY19 DPU.

Overall, we tweak our Keppel REIT's FY20F DPU marginally by -0.01% and raise our FY21-22F DPU by 2.48-3.92% to factor in earnings contributions from the new acquisition, as well as savings from the lower coupon rate of the new perpetual securities. Accordingly, our DDM-based Target Price is lifted to S$1.25.
See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.
Potential catalysts would be redeployment of divestment proceeds into new accretive acquisitions and a better-than-projected office rental market, while downside risk would be longer-than-expected frictional vacancy from tenant movements due to a slowdown in demand for office space.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-14

SGX Stock Analyst Report ADD MAINTAIN ADD 1.25 UP 1.200