K-REIT – BT

K-Reit DPU up 4% after asset swap

Unit-holders recommended to vote in favour of planned transactions

A PROPOSED asset swap between Keppel Land and its unit K-Reit Asia would increase the latter’s distribution per unit (DPU) by 4 per cent without the need for equity raising, according to a circular that K-Reit sent to its unit-holders yesterday.

K-Reit’s manager said that unit-holders would enjoy a higher DPU of 6.68 cents for the forecast year of 2011, up from 6.42 cents upon the completion of the transactions.

Last month, the two companies announced a deal under which K-Reit would acquire a one-third interest in Marina Bay Financial Centre (MBFC) Towers 1 & 2 and Marina Bay Link Mall from Keppel Land, and at the same time would dispose of Keppel Towers and GE Tower to its sponsor.

Some analysts have questioned if the deal is as beneficial to both parties as claimed. They asked if the MBFC purchase would be yield-accretive to K-Reit and whether Keppel Towers and GE Tower could have fetched a higher price in competitive bidding. They also pointed out that K-Reit would have to increase its borrowings to fund the purchase of MBFC. Yesterday’s circular answered some of the questions raised.

The deal would be yield-accretive, but only if the interest rates for the new borrowings remain between 2.5 per cent and 3.25 per cent per annum, the Reit’s manager said. A 50-basis point increase in the base case borrowing costs would reduce the DPU to 6.31 cents. Fluctuations in interest rates would have the impact on the DPU of K-Reit following the transactions.

But based on the current low interest rate environment, K-Reit’s move to take on new debt would reduce its average borrowing cost to 3.05 per cent, from 3.4 per cent as at Sept 30, 2010. The trust’s weighted average debt maturity would also increase to 4.1 years, from 1.4 years.

As for the valuations of the transactions, K-Reit’s independent financial adviser PricewaterhouseCoopers Corporate Finance (PwCCF) has said that it considers them fair. In particular, the sale price of $573 million for Keppel Towers and GE Tower is higher than the average of the open market values of the two buildings as appraised by the independent valuers – Savills and Knight Frank – on the ‘highest and best use basis’, it said.

Based on that, and having considered the rationale for the transactions, PwCCF advised that the independent directors recommend that unit-holders vote in favour of the transactions, which will be proposed at an extraordinary general meeting on Dec 8. Similarly, the independent directors of Keppel Land have also recommended that minority shareholders vote in favour of the transactions.

Since the proposed deal was announced, Keppel Land’s share price has shot up 23 per cent, outperforming the FTSE ST Real Estate Holding and Development Index by a whopping 20 percentage points. K-Reit, meanwhile, has edged up a mere 1.5 per cent. But still, it managed to pip the Reit Index by half a percentage point.