KepREIT – CIMB

Divest to invest

KREIT has just announced that Prudential Tower will be divested for S$512m, or 6.3% above its book value. While the price is attractive and the divestment could pave the way for KREIT’s potential acquisition of MBFC Tower 3, we estimate that income support may be required to make any such acquisition yield-accretive. We slightly lower our DPU estimates and DDM-based (discount rate 8.5%) target price after adjusting for the divestment. We

maintain our Hold rating while awaiting more news on the acquisition.

What Happened

KREIT has entered into an agreement with a JV under KOP for the divestment of its 92.8% stake in Prudential Tower for S$512m. Completion of the sale is expected on 26 Sep 14.

What We Think

Attractive divestment price. The price of S$2,288 psf is 6.3% above book value, which implies that Prudential Tower will be sold at a low NPI yield of 2.3% (based on FY13 NPI and 100% occupancy), an attractive divestment price, in our view. KREIT is expected to book a net divestment gain of S$9.0m, which could pave the way for its acquisition of MBFC Tower 3. Although Prudential Tower accounts for 8.4% of KREIT’s FY13 NPI, interest savings is expected to mitigated the net drop in DPU by 3.4% and 1.6% in FY14/15 respectively.

Potential acquisition of MBFC Tower 3. Although no details have been divulged, our estimation suggests that if MBFC Tower 3 is acquired at S$2,555 psf (similar to what DBS paid last year for 30% of the tower), it can potentially add 0.9% to KREIT’s DPU yield, if: i) rental rates are supported at S$11 psf/month; and ii) 80% of the remaining S$651m (valuation of Tower 3 at S$1,150m minus S$499m) is financed through debt at an interest rate of 2.15%; resulting in a gearing of 44.2%. Having said that since S$2,555 was paid before the upturn of the office market, the income support can potentially be higher if the acquisition is executed at a higher price. The attractiveness of this potential acquisition rests largely on KREIT’s ability to lift passing rents for the property to the level of income support; considering that DBS is also the anchor tenant of the property.

What You Should Do

Continue to Hold at a slightly lower target price of S$1.21, while we await for more clarity on the potential acquisition.