K-REIT – BT

K-Reit Asia shares take a hit

Market surprised by ‘optimistic’ purchase of Ocean Financial Centre

Shares of K-Reit Asia fell around 10 per cent yesterday to a one-year low on news that the office trust will pay some $1.57 billion to buy parent company Keppel Land’s 87.5 per cent stake in Ocean Financial Centre (OFC).

K-Reit ended 10 cents or 9.7 per cent down at 93 cents a unit yesterday.

Keppel Land shares also fell amid a broad stock market pullback. The property group shed three cents or 1.1 per cent to close at $2.69.

Analysts said the market was surprised by K-Reit’s ‘optimistic’ purchase but think that the asset sale will be positive for Keppel Land.

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

Nomura analyst Sai Min Chow pointed to the average passing rent of ‘just’ $9 per square foot per month at OFC and the cost of the equity to be raised by K-Reit for his bearish 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.’

OFC, which has about 885,000 square feet of net lettable area, is around 80 per cent let at present.

Standard Chartered analyst Wong Yan Ling also pointed out that the market had expected the acquisition to take place in the first half of 2012 and ‘may be taken by surprise that the acquisition will be completed by end 2011’.

In addition, without any income support from Keppel Land and assuming a potential increase in debt cost to a normalised long-term average of 4 per cent, the acquisition could prove dilutive to K-Reit’s long-term earnings, she said.

The price for OFC works out to about $2,600 psf based on a 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.

Nomura has a ‘neutral’ call with a target price of $1.23 on K-Reit, while Standard Chartered has an ‘underperform’ call and a price target of 85 cents on the stock.

For Keppel Land, on the other hand, the asset divestment was seen to be positive.

‘Through this transaction, Keppel Land’s net debt to equity ratio would fall from 37.6 per cent to a mere 3 per cent which would fortify its balance sheet and give management increased flexibility for capital deployment,’ said OCBC Investment Research analyst Eli Lee.

‘Given that management continues to see strong long-term prospects in Singapore and China, we believe there could be compelling opportunities for distressed assets should macro conditions deteriorate further.’

The stock is now trading at a 42 per cent discount to its revalued net asset value of $4.73 – similar to the average of 43 per cent discount during the previous downturns, noted Royal Bank of Scotland (RBS) analyst Fera Wirawan: ‘We believe that any potential rental correction had been priced in.’

Keppel Land is also poised to pay out a special dividend to shareholders, several analysts said.

OCBC Investment Research has a ‘buy’ call on Keppel Land with a $3.97 target price, while RBS has a ‘buy’ call and a target price of $4.26.