Keppel REIT - UOB Kay Hian 2020-09-15: Enlarging Footprint Down Under


Keppel REIT - Enlarging Footprint Down Under

  • Keppel REIT continues to expand its footprint in Australia through the acquisition of Pinnacle Office Park, which will increase its exposure to Australia from 16.3% to 19.4% of AUM. Pinnacle Office Park is located at close proximity to Macquarie Park Metro Station and will benefit from the completion of the City and Southwest metro rail in 2024. The acquisition is fully funded by A$-denominated debt and is accretive to pro-forma 2019 DPU by 4.5%.
  • Maintain BUY on Keppel REIT. Target price: S$1.40.

Diversifying into suburban business park.

  • Keppel REIT (SGX:K71U) will buy from the Goodman Group a 100% stake in Pinnacle Office Park, comprising three freehold Grade-A office buildings located in Macquarie Park in Sydney, at agreed property value of A$306.0m (S$303.3m). The initial NPI yield is 5.25%. The total NLA is 35,132sm (378,165sf).
  • The vendor has agreed to provide rental guarantee for up to 12 months after the date of completion. An aggregate A$2.1m will be paid on completion of the transaction. The rental guarantee is calculated based on market rental.

Good location at Macquarie Park.

  • Pinnacle Office Park is located at close proximity to Macquarie Park Metro Station and a major bus interchange. It is expected to benefit from the completion of the City and Southwest metro rail in 2024, which will reduce the commuting time between Macquarie Park and the CBD to just 20 minutes. It is also close to Macquarie Centre, Sydney’s largest suburban shopping centre.

Quality tenants from technology, media & telecommunications (61.3%) sector.

  • Pinnacle Office Park has a committed occupancy of 96.3%. Key tenants include Aristocrat Technologies (gaming solutions provider listed on ASX), Konica Minolta and Coles Supermarkets. The property has a WALE by NLA of 4.8 years. Its existing leases have fixed annual rental escalations of 3-4%.

Macquarie Park is resilient despite COVID-19 pandemic.

  • Macquarie Park is the only office market to register positive net absorption of more than 10,000sqm in 2Q20 due to demand from the pharmaceutical and technology industries. Vacancy rate has dropped 2.6ppt q-o-q to 5.2% in 2Q20.
  • Macquarie Park is ideal for companies seeking cost-effective space at suburban business parks. It is located at close proximity and benefit from improved transportation links to the CBD.

Diversification from overseas expansion.

  • Keppel REIT’s AUM will increase by 4% to S$8.2b. The freehold portion of its portfolio will expand from 30.3% to 37.1% of total NLA. The exposure to Australia will increase from 16.3% to 19.4% of AUM. Correspondingly, its Singapore’s exposure will be reduced by 3ppt to 77%. Management intends to expand the proportion of overseas properties to 25-30% of AUM.

Funded by additional debt and is DPU accretive.

  • The acquisition is targeted to complete in 4Q20. It will be fully funded with A$-denominated debt for natural hedging. On a pro forma basis, the acquisition is accretive to 2019 DPU by 4.5%. Keppel REIT's NAV per unit remains unchanged at S$1.35.
  • Post-acquisition, Keppel REIT’s leverage will increase from 36.3% to 38.7%.

Potential for value creation through redevelopment.

  • One of the three office buildings, 6 Giffnock Avenue, has the potential to be re-developed into a new office building with a higher NLA. Management estimates the NLA could increase from 3,940sqm to 17,000sqm, subject to approval from local authorities.

Refinancing of perpetual securities.

  • Keppel REIT issued S$150m 3.15% subordinated perpetual securities in Sep 20. The new perpetual securities replaces the existing S$150m 4.98% subordinated perpetual securities due in Nov 20. Thus, the “refinancing” generated savings of S$2.7m per year.

Maintain BUY on Keppel REIT

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-15
SGX Stock Analyst Report BUY MAINTAIN BUY 1.40 UP 1.300