KepREIT – DBSV

Acquiring MBFC Tower 3 finally

• Acquires MBFC Tower 3 at c. 3.6% initial yield
  
• Lower risk profile due to drop in average age of portfolio and better cashflow visibility
  
• HOLD, TP maintained at S$1.29
  

Purchases MBFC Tower 3 for S$1,248m. K-REIT announced the acquisition of a one-third stake in MBFC Tower 3 from sponsor, Keppel Land, for S$1,248m or S$2,790 psf. This represents a 2-3% discount to independent market valuations and within the S$2,181-2,830psf range of recently transacted CBD properties which we think is fair considering MBFC Tower 3’s premium location. Including income support, the initial yield stands at c. 3.6%.

Strengthens exposure to tight Singapore office market. By recycling the proceeds from the sale of the older Prudential Tower, an equity fund raising of c.S$413m and additional debt raised, the purchase of MBFC Tower 3 further strengthens K-REIT’s exposure to the tight premium grade office market. In addition, KREIT’s risk profile has been reduced, as the average age of its portfolio has dropped from 6.2 years to 5.5 years, lowering the need for extensive AEI’s. Furthermore, cash flow visibility has improved with the WALE for its top 10 tenants (46% of NLA) lengthening to 9.2 years from 8.5 years. Post acquisition, our FY15/16F DPU is lifted by a marginal c.0.1% with FY15 gearing increasing to c. 42%. Our DCF-based TP is maintained at S$1.29.

Near term re-rating; medium term earnings risks in FY15/16F; maintain HOLD. With the purchase of MBFC Tower 3 and equity fund raising “overhang” removed, we expect a near term re-rating of the stock. However, we see medium term risks coming from the fall-off of rental support from Ocean Financial Center, which is fairly significant (FY15 to see a c.11% drop in DPU). As such, forward yields of c.5.6%-5.7% (ex –OFC income support) are fair in our view, and we maintain our HOLD call.