• The Dec 3rd follow-up piece on S-Reits by the local columnist (Pros & Cons Of Rights Issues In Reits) could well dissuade some unitholders from subscribing for their entitlement to K-Reit’s 17-for-20 for rights at 85 cents each. (The Offer, which is being underwritten, closes at 5 / 9 pm today Dec 5th.)

• While the yield based on proforma DPU of 6.72 cents is tempting, we would go along and give the 17-for-20 rights a miss. Other reasons:

a. enough “damage” caused by one too many asset purchases with top-ups, the latest and for which the rights was called, being Ocean Financial Centre;

b. aggravated by uncertainties caused by the euro crisis so soon after the ’08 financial crisis with global banks again having to cut costs. This will likely affect demand for office space.

Sale of KepLand’s Ocean Financial Centre stake to K-Reit surprises analysts

They say it may have been disadvantageous to the Reit’s unitholders

The sale of Keppel Land’s entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows.

Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders.

For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years.

Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim.

In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans.

The office market remains highly correlated to the country’s economic performance and employment in business and financial services, CBRE said in a recent report.

‘They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,’ said one analyst.

A second analyst said: ‘Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.’

Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. ‘The price is at the top of the market. Granted that it’s a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?’ he said. ‘The deal is skewed towards the parent.’

He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. ‘It’s a good idea if it is being used to purchase depressed assets,’ he said.

Still other analysts, while cautious, were more optimistic over the deal.

‘It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,’ said a Daiwa report. The big concern is whether the income support is sustainable, it added.

Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa’s estimates, should raise the overall current rent to $14 psf and be ‘just enough’ to last until 2016.

If in 2015 and 2016 – when nearly 30 per cent of the leases are up for renewal – spot rents hit $10.60 and $11.70 respectively, there would be ‘significant decline’ in Ocean Financial Centre’s contribution in 2017, it said. ‘However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.’

In a client note, Credit Suisse said ‘admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect’.

But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added.

The approval from unitholders also came via a show of hands at the extraordinary general meeting – a practice that the Code of Corporate Governance no longer accepts as sound governance – and amid criticisms from minority unitholders over the price and timing.

‘Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,’ said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute.

A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number.

All interested parties that included Keppel Land were not allowed to vote.

BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal.

Keppel Land said the sale would ‘unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate’.

As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion.

The deal is also expected to be accretive to the Reit’s distribution per unit from the cash flows generated, and should improve K-Reit’s lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years.

K-Reit gains nod to buy Ocean Financial Centre, despite dissent

K-REIT Asia’s plan to buy 87.5 per cent of Ocean Financial Centre (OFC), and raise $976 million through a rights issue to fund part of the cost, was approved by shareholders yesterday – but not without plenty of dissent.

Numerous shareholders took to the floor at a two-hour-long extraordinary general meeting (EGM) at Marina Bay Sands to challenge the rationale behind the deal and the rights issue.

K-Reit on Oct 17 said that it will pay some $1.57 billion to buy parent company Keppel Land’s entire stake in the OFC office building. Excluding rental support from KepLand, the estimated sale price of OFC works out to $2,380 per square foot.

Shareholders questioned the price and timing of the deal.

‘My issue is with the timing of the deal,’ said the representative of an institutional investor. ‘We are paying a price that is at a historic high, at the time when the economy is slowing down. Why can’t K-Reit wait half a year or one year, and then buy something else or even this property at a cheaper price?’

Likewise, a retail investor also said that the price was hefty for a 99-year-leasehold project.

The prime Grade A office building in Raffles Place has a tenure of 999 years with 850 years remaining on the lease. But KepLand is selling its stake with only a 99-year lease.

K-Reit’s management team defended the price. Chief executive Ng Hsueh Ling noted that the building is new (it was completed only in April 2011) and won’t need upgrading work for some time.

Chairman Tsui Kai Chong also noted that the price was arrived at on a ‘willing buyer, willing seller basis’.

‘Our father organisation, Keppel Land, is only willing to sell it (OFC) to us for 99 years,’ he said.

Mano Sabnani, chief executive of Rafflesia Holdings, then noted that K-Reit is paying its manager (which is owned by KepLand) an acquisition fee – even though it is buying the asset from its parent company and no ‘finding’ was involved as OFC was ‘right there’.

Prof Tsui said that he will bring this up at the ‘family talk’, drawing some laughter from the audience.

Shareholders also pointed out that this marks K-Reit’s third rights issue since 2008.

‘When people invest in Reits, they expect certain things . . . (such as) stable dividends and that there won’t be frequent cash calls,’ said an investor.

He wondered if K-Reit should have undertaken a placement exercise instead.

In response, Prof Tsui said that the office trust chose to go with a rights issue to avoid diluting existing shareholders’ stakes, which a private placement would have done.

‘Moving forward, when we are larger, our fund-raising might become easier, then perhaps we will look at placements,’ he said.

But despite the dissent, both resolutions – to buy the OFC stake and for the rights issue – were passed. A motion by the representative of the institutional investor to vote by poll (when shareholders’ votes are allocated based on their holdings) failed, and an overwhelming majority passed both resolutions with a show of hands.

KepLand, which held its own EGM earlier in the day to ask for shareholders’ permission to sell its OFC stake, also gained approval.

K-Reit shares lost one cent to close at $1.015 yesterday, while Keppel Land shed seven cents to close at $2.66.

K-Reit’s OFC deal wins nod from Moody’s

S&P gives trust BBB rating, with ‘stable’ outlook

TWO rating agencies have issued new reports on K-Reit Asia after news this week that the office trust will acquire from parent company Keppel Land an 87.5 per cent interest in Ocean Financial Centre (OFC) – for a period of 99 years – for $1.57 billion.

Moody’s Investors Service on Wednesday changed its outlook on K-Reit’s ‘Baa3’ corporate family rating to positive from stable. And Standard & Poor’s Ratings Services (S&P) yesterday initiated coverage with a ‘BBB’ long-term corporate credit rating and a ‘stable’ outlook.

K-Reit has also proposed a 17-for-20 rights issue, which is expected to raise around $976.3 million, to part-finance the purchase. New debt of around $602.6 million will cover the rest of the cost.

Moody’s views the proposed acquisition as ‘mildly positive’ as it will result in a much strengthened property portfolio – although at the expense of somewhat higher leverage in the interim, said analyst Alvin Tan.

‘By acquiring another prominent commercial asset in Singapore’s central business district, K-Reit will substantially increase its total portfolio size by 52 per cent to $5.9 billion,’ Mr Tan said.

He added that although the scale of the transaction is substantial, the financing plan comprising a ‘balanced’ combination of debt and equity issue will result in only a modest increase in total debt/deposited property value to 41 per cent from 39 per cent.

S&P credit analyst Loy Wee Khim thinks that the proposed acquisition will enhance the trust’s business risk profile.

But Ms Loy added: ‘We believe K-Reit’s financial risk profile will weaken after it acquires OFC.’

‘In our base-case scenario, we expect the trust’s leverage (ratio of adjusted total debt to property portfolio value) to rise to about 42 per cent by the end of 2011. We, however, expect the ratio to decline to less than 40 per cent in the next one to two years and be in line with our expectations for the BBB rating,’ said Ms Loy.

S&P’s rating on K-Reit reflects the trust’s good quality assets, solid market position in the Singapore commercial space, and an intermediate financial risk profile.

But the trust’s limited geographic diversity – with 93.1 per cent of its assets located in Singapore – and an increased concentration of tenants from financial institutions temper these strengths, Ms Loy said.

K-Reit shares eased half a cent to close at 93.5 cents yesterday.

Expected move, unexpected timing

• Results in line, 9M DPU forms 78% of our FY11F estimate

• OFC acquisition, a long-term strategic positive

• Limited near term sector catalyst; maintain Hold

In line with expectations. 3Q gross revenue and NPI declined by 14.5% y-oy and 16.3% to S$18.6m and S$14. 6m respectively due to the sale of KTGE Towers, which was partially offset by contributions from its Australian portfolio. The 4.6x increase in associates’ contribution (one-third stake in MBFC Phase 1) lifted distributable income to S$26.7m (+17.7%), translating to a DPU of 1.96Scts. 9M DPU forms 78% of FY11F estimates. Portfolio occupancy remained healthy at 98% with limited leases up for renewals for the remainder of the year.

Strategic long-term positive move. Separately, K-Reit announced that it is purchasing an 87.5% interest in Ocean Financial Centre (OFC) from Keppel Land at S$2.013b or S$2,600psf including an income support of S$170m until end 2016 or 4.25% cap rate. Net of the S$441.8m adjustments including ongoing construction of the carpark and retail podium and other transaction costs, total consideration will be S$1.578b. Although timing was a little unexpected, we see this deal as a strategic long-term positive for Kreit with the ability to deepen its presence in the prime CBD area, upgrade its portfolio quality as well as ensure a strong and stable income stream for unitholders through the long leases and a blue chip tenant base. Committed occupancy at OFC is at 79.6% with underlying monthly rent of $9psf. Kreit will fund the purchase with S$602.6m debt (38%) and S$976.3m (62%) of equity through a 17-for-20 rights issue at 85Scts per unit. Gearing is expected to head up to 41.6% post acquisition.

Maintain Hold. Our current numbers have not included the OFC acquisition. In terms of financial impact, the purchase is likely to be accretive, lifting our FY12 DPU estimates by 4.4% on a fully diluted basis while book NAV per unit could moderate to cS$1.19 based on Dec 2010 balance sheet due to the enlarged unit base. In terms of valuation, our current target price of $1.32 could potentially be diluted by 11%, after taking into account the expansion in issued units and factoring in the additional contributions as well as rolling forward into FY12 numbers. Post acquisition, we believe Kreit would gain more brand recognition and visibility as the largest prime commercial landlord and as the 3rd largest Sreit by asset size. However, current global macro uncertainties could likely be an overhang in the office sector. Maintain Hold.