K-REIT – BT

K-Reit buying 87.5% of Ocean Financial Centre

Deal with parent Keppel Land costs around $1.57b; rights issue expected to raise around $976.3m

K-Reit Asia will fork out some $1.57 billion to buy parent company Keppel Land’s entire stake in the Ocean Financial Centre (OFC) office building, both parties said yesterday.

K-Reit, owns commercial properties in Singapore and Australia, will acquire 87.5 per cent of OFC with a 99-year lease.

The prime Grade A office building in Raffles Place – which has about 885,000 square feet of net lettable area – has a tenure of 999 years with 850 years remaining on the lease.

But Keppel Land is selling its stake with only a 99-year lease. At the end of the 99 years, the developer can exercise a call option to re-gain OFC.

K-Reit said it intends to raise around $976.3 million through a 17-for-20 rights issue to fund part of the purchase.

Keppel Land, on its part, is poised to see a net gain of about $492.7 million from the sale.

The price for OFC works out to about $2,600 per square foot (psf) – based on an agreed value of $2.01 billion for the 87.5 per cent stake, which includes rental support of up to $170 million from the completion of the sale to end 2016.

But K-Reit will pay Keppel Land only $1.57 billion after taking into account ‘adjustments’ such as outstanding loans.

Market watchers said that the psf price of $2,600 marks a new high for an office block deal in this cycle – since Lehman Brothers’ collapse three years ago. The previous high was $2,524 psf for the freehold One Finlayson Green in March 2010.

And in the strata office floor segment, the recent benchmark is $2,800 psf for the 20th floor of the 999-year leasehold Samsung Hub on Church Street.

But analysts noted that excluding the support of $170 million, the estimated the sale price of OFC works out to a lesser around $2,400 psf.

‘It seems to be a fair price based on the current market,’ said Cushman & Wakefield Singapore vice-chairman Donald Han.

The 43-storey OFC was recently redeveloped by Keppel Land and received its temporary occupation permit in April 2011.

The minority interest of 12.5 per cent in OFC is owned by Avan Investments, a privately owned company.

The property is currently around 80 per cent let with an average passing rent of about $9 psf per month, said Ng Hsueh Ling, K-Reit’s chief executive, at a briefing yesterday.

Tenants include the Australia and New Zealand Banking Group, BNP Paribas, Drew & Napier and Stamford Law Corporation.

Keppel Land’s sale of OFC to K-Reit follows a similar transaction just one year ago. In October 2010, Keppel Land sold its one-third stake in phase one of Marina Bay Financial Centre to K-Reit for $1.427 billion – or $2,450 psf of net lettable area.

K-Reit’s Ms Ng said that the acquisition of OFC will enhance the trust’s portfolio significantly and boost its distribution per unit to unitholders.

The deal will also reduce the average age of K-Reit’s property portfolio by net lettable area (NLA) from around six years to four years, and also improve the lease expiry profile such that no more than 11 per cent of the portfolio by NLA will expire in any one year over the next five years.

K-Reit has proposed a 17-for-20 rights issue, which is expected to raise around $976.3 million, to partly the purchase. New debt of around $602.6 million will cover the rest of the cost.

The 1.16 billion new rights units will be priced at 85 cents each, which represents a discount of 17.5 per cent to K-Reit’s last closing price of $1.03 yesterday.

Parent companies Keppel Land and Keppel Corp will take up all of the 76.3 per cent of the new rights units that they are entitled to, K-Reit said.

For Keppel Land, the sale will cut its gearing from 37.6 per cent to about 3 per cent – boosting its financial capacity for more acquisitions.

The property group has already snapped up three sites in Singapore and China for about $900 million in 2011.

‘This strategic move will enhance Keppel Land’s financial position to capture opportunities in a volatile market and take on more development projects in the region to achieve higher returns,’ said Keppel Land group chief executive Kevin Wong.

Noted Standard Chartered analyst Regina Lim: ‘We think Keppel Land is likely to invest in more residential sites in Singapore and China in 2012, possibly increasing the weights in its revalued net asset value from the current respective figures of 18 per cent and 20 per cent.’

She added that the developer could also pay a special dividend.

But for K-Reit, the market’s immediate reaction to the news is likely to be ‘neutral to negative’, said Nomura analyst Sai Min Chow. He cited the average rent of ‘just’ $9 psf per month – among other things – for his view.

‘It appears the manager will have to achieve very high rates for the remaining 20 per cent uncommitted office space as well as the retail podium that is scheduled for completion at end-2012 – notwithstanding the rental support from the vendor,’ Mr Sai said. ‘In an environment of softening leasing demand, this could be optimistic.’

Both Keppel Land and K-Reit yesterday requested a halt in the trading of their shares pending the announcement. Before the halt, Keppel Land gained seven cents to close at $2.72, while K-Reit gained three cents to end at $1.03.