KepREIT – CIMB

Acquisition of MBFC Tower 3

KREIT just announced the highly anticipated acquisition of MBFC Tower 3. Although this iconic office building could strengthen the REIT’s portfolio and diversify its tenant base, the resulting yield dilution is disappointing. As a result of the estimated DPU dilution of 3.6% in FY15 and 3.8% in FY16, we maintain our Hold rating with a lower DDM-based (discount rate: 8.4%) target price of S$1.21, as we factor this weakness into our model.

What Happened

Keppel REIT (KREIT) said it has entered into a conditional share purchase agreement with Bayfront Development Pte Ltd. for the acquisition of a one-third stake in Marina Bay Financial Centre Tower 3 (MBFC Tower 3) for a purchase consideration of S$1,248m. This property is a 46-storey premium grade A commercial building with ancillary retail space situated in the heart of Marina Bay, with an attributed NLA of c.447,000 sq ft and an occupancy of 94%. After the adjustments for net liabilities, total purchase consideration is S$710.1m and will be satisfied by way of issuance of S$185m worth of units to the vendor and cash payment for the balance. The cash will originate from i) 195m of new KREIT units to be issued via a placement at an issue price of S$1.17/unit (4.88% discount to the last traded price); ii) part of the proceeds (S$185.2m) from the Prudential Tower divestment; and iii) borrowings of S$120.7m.

What We Think

The value of S$1,248m translates to a value of S$2,790psf – c.9% higher than what DBS paid for its 30% stake in late 2012. Including the five-year rental support of S$10.40-10.80 psf/month, the initial yield is estimated at c.3.5%. Taking into consideration the expiry profile, coupled with an expected growth in rental spot rate by 10% and 5% in FY15 and FY16 respectively, we estimate the passing rent to surpass the supported level by FY18, by which time the majority of the leases in the property would have been renewed. However, on the back of new units being issued, coupled with a resultant leverage ratio of 43.8%, we estimate KREIT’s DPU to be diluted by 3.6% in FY15 and 3.8% in FY16 as a result of this acquisition. Having said that, this weakness could potentially be mitigated if KREIT is able to obtain the Limited Liability Partnership tax transparency status as per MBFC Tower 1 & 2.

What You Should Do

Factoring in the lower DPU over the next few years as a result of this acquisition, we have maintained our Hold rating on KREIT with a lower target price of S$1.21.