KEPPEL REIT (SGX:K71U)
Keppel REIT - Shopping Resumes
- Keppel REIT expands into key Australian metropolitan office market with acquisition of Pinnacle Office Tower, Macquarie Park, Sydney.
- Acquisition priced at A$306m, initial NPI yield of 5.25%.
- Acquisition is fully debt funded with 4.5% DPU accretion.
- Investment offers exposure to prime suburban office and redevelopment potential for medium-term growth.
Keppel REIT expands its Australia portfolio
- Keppel REIT (SGX:K71U) expands its Australia portfolio into Sydney’s Silicon Valley, with the acquisition of a 100% interest in a freehold property, Pinnacle Office Park, Macquarie Park, Sydney for A$306m (c. S$303.3m) with an initial NPI yield of 5.25% from Goodman Group. This is probably the first acquisition made among the non-industrial and logistics REITs during this period.
- Key highlights of the acquisition:
- The agreed property value is A$306m (c. S$303.3m). Total cost of acquisition is c. A$329m (c. S$326.1m).
- The asset comprises 3 office buildings located in Macquarie Park in Sydney with NLA of 35k sqm / 378k sqft.
- Committed occupancy is 96.3% with rental guarantee of A$2.1m for relevant vacant premises, until the later of 31 Dec 2021 and 12 (or 6) months after the date of completion. Management remains confident to backfill the potential vacancies.
- The initial NPI yield is 5.25% (including rental guarantee).
- WALE of the asset is 4.8 years with no major leases expiring in the next 1-2 years, extending portfolio WALE to 6.9 years (including 311 Spencer St).
- All leases have fixed annual rental escalations of between 3% and 4%.
- We understand that current average rents are slightly under-rented, thus there is potential upside in the near-term when leases expire.
- Key tenants include Aristocrat Technologies, Konica Minolta and Coles Supermarket.
- The acquisition will be 100% funded by AUD- denominated loan.
- Based on pro-forma financials vs FY2019, the acquisition is 4.5% DPU accretive (3.2% accretion if assume partially funded by the recent perpetual securities issued) while adjusted NAV will remain flat.
- Pro forma aggregate leverage would increase to 38.7% vs 36.3% as at Jun20 and 35.8% as at Dec19.
- One of the three free-standing buildings, 6 Giffnock Avenue has redevelopment potential that could increase its NLA by more than 4 times and increase total portfolio NLA by 37% to 48k sqm vs 35k sqm currently, subject to approval by local authorities.
- Acquisition is expected to complete in 4Q20.
Our Views
- We believe the DPU-accretive acquisition bodes well for Keppel REIT as it redeploys some of its capital post a series of divestments in the past few years and offers DPU growth with an accretive acquisition and embedded rental escalations. In addition, the redevelopment potential in one of the buildings would boost organic growth in the future when approvals are obtained from the authorities.
- Despite Keppel REIT’s entry into a CBD fringe / regional office asset, the asset is a Grade A office asset located in Macquarie Park, the second largest office market in New South Wales (some may call it the Silicon Valley of Sydney). This will not lower the quality of Keppel REIT’s portfolio of assets which comprises Grade A office assets located in prime CBD of major cities in Singapore, Australia and Korea. We note that 61% of its tenants are from the technology, media and telecommunications sector which is one of the few sectors that are growing during these challenging times.
- In addition, we believe that the acquisition is an opportunity for Keppel REIT to diversify its offerings to tenants post COVID-19, as they may look towards split offices in suburban locations which are closer to employees’ homes and lower commute times.
Maintain BUY; Target Price of S$1.35.
- We maintain our BUY rating on Keppel REIT with Target Price of S$1.35.
- See Keppel REIT Share Price; Keppel REIT Target Price; Keppel REIT Analyst Reports; Keppel REIT Dividend History; Keppel REIT Announcements; Keppel REIT Latest News.
- We believe Keppel REIT’s best-in-class office portfolio anchored by Singapore Grade A offices in prime CBD locations is well-positioned to benefit from a potential recovery in a very tight net supply market.
- Post the potential CMT-CCT merger, Keppel REIT would be the only pure office REIT, which we believe will be highly valued by investors. Current valuation at 0.8x P/NAV is below historical average, attractive to ride on a potential recovery.
- In addition, the opportunity of redevelopment of 6 Giffnock Avenue and potential participation in the redevelopment of Keppel Towers will be key drivers of Keppel REIT’s medium-term growth.
Rachel TAN
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2020-09-15
SGX Stock
Analyst Report
1.350
SAME
1.350
