K-Reit Asia shares take a hit

Market surprised by ‘optimistic’ purchase of Ocean Financial Centre

Shares of K-Reit Asia fell around 10 per cent yesterday to a one-year low on news that the office trust will pay some $1.57 billion to buy parent company Keppel Land’s 87.5 per cent stake in Ocean Financial Centre (OFC).

K-Reit ended 10 cents or 9.7 per cent down at 93 cents a unit yesterday.

Keppel Land shares also fell amid a broad stock market pullback. The property group shed three cents or 1.1 per cent to close at $2.69.

Analysts said the market was surprised by K-Reit’s ‘optimistic’ purchase but think that the asset sale will be positive for Keppel Land.

K-Reit shares were also hit after it said it intends to raise around $976.3 million through a 17-for-20 rights issue to fund part of the purchase.

Nomura analyst Sai Min Chow pointed to the average passing rent of ‘just’ $9 per square foot per month at OFC and the cost of the equity to be raised by K-Reit for his bearish view.

‘It appears the manager will have to achieve very high rates for the remaining 20 per cent uncommitted office space as well as the retail podium that is scheduled for completion at end-2012 – notwithstanding the rental support from the vendor,’ Mr Sai said. ‘In an environment of softening leasing demand, this could be optimistic.’

OFC, which has about 885,000 square feet of net lettable area, is around 80 per cent let at present.

Standard Chartered analyst Wong Yan Ling also pointed out that the market had expected the acquisition to take place in the first half of 2012 and ‘may be taken by surprise that the acquisition will be completed by end 2011’.

In addition, without any income support from Keppel Land and assuming a potential increase in debt cost to a normalised long-term average of 4 per cent, the acquisition could prove dilutive to K-Reit’s long-term earnings, she said.

The price for OFC works out to about $2,600 psf based on a value of $2.01 billion for the 87.5 per cent stake – which includes rental support of up to $170 million from the completion of the sale to end 2016.

But K-Reit will pay Keppel Land only $1.57 billion after taking into account adjustments such as outstanding loans.

Nomura has a ‘neutral’ call with a target price of $1.23 on K-Reit, while Standard Chartered has an ‘underperform’ call and a price target of 85 cents on the stock.

For Keppel Land, on the other hand, the asset divestment was seen to be positive.

‘Through this transaction, Keppel Land’s net debt to equity ratio would fall from 37.6 per cent to a mere 3 per cent which would fortify its balance sheet and give management increased flexibility for capital deployment,’ said OCBC Investment Research analyst Eli Lee.

‘Given that management continues to see strong long-term prospects in Singapore and China, we believe there could be compelling opportunities for distressed assets should macro conditions deteriorate further.’

The stock is now trading at a 42 per cent discount to its revalued net asset value of $4.73 – similar to the average of 43 per cent discount during the previous downturns, noted Royal Bank of Scotland (RBS) analyst Fera Wirawan: ‘We believe that any potential rental correction had been priced in.’

Keppel Land is also poised to pay out a special dividend to shareholders, several analysts said.

OCBC Investment Research has a ‘buy’ call on Keppel Land with a $3.97 target price, while RBS has a ‘buy’ call and a target price of $4.26.

• K-Reit’s unit price will likely “do little” in the near term following its purchase of 87.5% of recently completed Ocean Financial Centre.

• Like all its recent yield-accretive acquisitions, the seller is sponsor K-Land which will provide income support for 5 years, and funding will come from a rights issue (17-for-20 to raise about $976 mln) and borrowings.

• K-Reit is paying $1571.3 mln.

• K-Land will realize profit of $493 mln.

• A key reason for not expecting much investors enthusiasm is that interest in the office sector has waned considerably because of the current crisis, which has led many international financial institutions to shrink workforce.

• K-Reit’s exposure to the Singapore office segment (primarily in Raffles Place, Marina Bay ) will rise to 93% from 89.5%.

• We maintain BUY on both K-Reit and K-Land, although there is likely no hurry to do so in the case of the former.

Valuation has turned compelling

Sturdy set of results. Ascendas REIT (A-REIT) reported a 9.6% YoY growth in 2QFY12 gross revenue to S$121.7m, due to contribution from completed development projects and acquisitions. While NPI grew at a slower pace of 7.9% YoY due to utility charges and change in lease structure, distributable income was up 14.1% to S$70.5m, due in part to lower interest expenses. On a QoQ basis, gross revenue grew 1.5%, while NPI and distributable income rose 2.0% and 6.9% respectively, boosted by completion of Nordic European Centre acquisition in Jul. 2QFY12 DPU was 3.38 S cents (+2.4% YoY, +5.6% QoQ), bringing 1HFY12 DPU to 6.58 S cents. This is slightly above our expectation, which makes up 54.0% of our full-year DPU forecast (49.5% of consensus).

Strong execution. A-REIT continued to deliver during the quarter, despite the current uncertain economic environment. Occupancy rates improved to 96.4% for the portfolio and 93.0% for the multi-tenanted buildings from 96.2% and 92.5% in 1QFY12 respectively. As anticipated, the group achieved positive rental reversion (1.8-11.6%) across all segments of its portfolio. Management guided that 6.7% of its property income is due for renewal for the remaining of FY12, and that the current market rental rates are still approximately 12-40% higher than the passing rents for area due for renewal. As such, we may see yet another round of positive rental reversion in 3Q.

No major refinancing risk. As at 30 Sep, A-REIT aggregate leverage was at 31.5%, a healthy level in our view. Even after funding all committed investments of ~S$255m (which will see leverage rise to 34.5%), the group still has an available debt headroom of ~S$555m before reaching the 40% mark. This places A-REIT in a comfortable position to fund potential investment opportunities as these arise. The group also recently renewed a S$200m committed revolving credit facility for another five years. Moreover, its debt is relatively well-spread, with no more than S$400m due for refinancing in any one year. Hence, we do not foresee any refinancing risk in A-REIT.

Upgrade to BUY. We raise our FY12 forecasts by 2.4-5.7% to accommodate the 2Q results. Accordingly, our DDM-based fair value is lifted to S$2.23 from S$2.17 previously. We like AREIT for its market leadershipleadership, resilient portfolio and proven track record. Noting that the stock has fallen since our last report to a level where we find compelling, we now upgrade AREIT from Hold to BUY.

K-Reit buying 87.5% of Ocean Financial Centre

Deal with parent Keppel Land costs around $1.57b; rights issue expected to raise around $976.3m

K-Reit Asia will fork out some $1.57 billion to buy parent company Keppel Land’s entire stake in the Ocean Financial Centre (OFC) office building, both parties said yesterday.

K-Reit, owns commercial properties in Singapore and Australia, will acquire 87.5 per cent of OFC with a 99-year lease.

The prime Grade A office building in Raffles Place – which has about 885,000 square feet of net lettable area – has a tenure of 999 years with 850 years remaining on the lease.

But Keppel Land is selling its stake with only a 99-year lease. At the end of the 99 years, the developer can exercise a call option to re-gain OFC.

K-Reit said it intends to raise around $976.3 million through a 17-for-20 rights issue to fund part of the purchase.

Keppel Land, on its part, is poised to see a net gain of about $492.7 million from the sale.

The price for OFC works out to about $2,600 per square foot (psf) – based on an agreed value of $2.01 billion for the 87.5 per cent stake, which includes rental support of up to $170 million from the completion of the sale to end 2016.

But K-Reit will pay Keppel Land only $1.57 billion after taking into account ‘adjustments’ such as outstanding loans.

Market watchers said that the psf price of $2,600 marks a new high for an office block deal in this cycle – since Lehman Brothers’ collapse three years ago. The previous high was $2,524 psf for the freehold One Finlayson Green in March 2010.

And in the strata office floor segment, the recent benchmark is $2,800 psf for the 20th floor of the 999-year leasehold Samsung Hub on Church Street.

But analysts noted that excluding the support of $170 million, the estimated the sale price of OFC works out to a lesser around $2,400 psf.

‘It seems to be a fair price based on the current market,’ said Cushman & Wakefield Singapore vice-chairman Donald Han.

The 43-storey OFC was recently redeveloped by Keppel Land and received its temporary occupation permit in April 2011.

The minority interest of 12.5 per cent in OFC is owned by Avan Investments, a privately owned company.

The property is currently around 80 per cent let with an average passing rent of about $9 psf per month, said Ng Hsueh Ling, K-Reit’s chief executive, at a briefing yesterday.

Tenants include the Australia and New Zealand Banking Group, BNP Paribas, Drew & Napier and Stamford Law Corporation.

Keppel Land’s sale of OFC to K-Reit follows a similar transaction just one year ago. In October 2010, Keppel Land sold its one-third stake in phase one of Marina Bay Financial Centre to K-Reit for $1.427 billion – or $2,450 psf of net lettable area.

K-Reit’s Ms Ng said that the acquisition of OFC will enhance the trust’s portfolio significantly and boost its distribution per unit to unitholders.

The deal will also reduce the average age of K-Reit’s property portfolio by net lettable area (NLA) from around six years to four years, and also improve the lease expiry profile such that no more than 11 per cent of the portfolio by NLA will expire in any one year over the next five years.

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

The 1.16 billion new rights units will be priced at 85 cents each, which represents a discount of 17.5 per cent to K-Reit’s last closing price of $1.03 yesterday.

Parent companies Keppel Land and Keppel Corp will take up all of the 76.3 per cent of the new rights units that they are entitled to, K-Reit said.

For Keppel Land, the sale will cut its gearing from 37.6 per cent to about 3 per cent – boosting its financial capacity for more acquisitions.

The property group has already snapped up three sites in Singapore and China for about $900 million in 2011.

‘This strategic move will enhance Keppel Land’s financial position to capture opportunities in a volatile market and take on more development projects in the region to achieve higher returns,’ said Keppel Land group chief executive Kevin Wong.

Noted Standard Chartered analyst Regina Lim: ‘We think Keppel Land is likely to invest in more residential sites in Singapore and China in 2012, possibly increasing the weights in its revalued net asset value from the current respective figures of 18 per cent and 20 per cent.’

She added that the developer could also pay a special dividend.

But for K-Reit, the market’s immediate reaction to the news is likely to be ‘neutral to negative’, said Nomura analyst Sai Min Chow. He cited the average rent of ‘just’ $9 psf per month – among other things – for his view.

‘It appears the manager will have to achieve very high rates for the remaining 20 per cent uncommitted office space as well as the retail podium that is scheduled for completion at end-2012 – notwithstanding the rental support from the vendor,’ Mr Sai said. ‘In an environment of softening leasing demand, this could be optimistic.’

Both Keppel Land and K-Reit yesterday requested a halt in the trading of their shares pending the announcement. Before the halt, Keppel Land gained seven cents to close at $2.72, while K-Reit gained three cents to end at $1.03.

K-Reit Q3 DPU up 16%

K-REIT Asia yesterday posted a distribution per unit (DPU) of 1.96 cents for the third quarter – 16 per cent higher compared with a year ago.

The annualised DPU works out to 7.78 cents, generating a distribution yield of 7.7 per cent based on K-Reit’s closing unit price of $1.005 as at Sept 30.

The improvement in DPU came on the back of a 17.7 per cent rise in distributable income to unitholders to $26.7 million.

Powering the increase in distributable income was a surge in contributions from associated companies, including one which owns Marina Bay Financial Centre Towers 1 & 2 and Marina Bay Link Mall. K-Reit’s share of results of these companies reached $10.9 million, which is 5.6 times that of last year’s $1.9 million.

Higher share of profits from associated companies helped to make up for a 16.3 per cent drop in net property income to $14.7 million. The decrease was partly due to the divestment of Keppel Towers and GE Tower last year.

For the nine months ended Sept 30, K-Reit’s DPU was 5.68 cents, up 22.2 per cent year on year. On an annualised basis, its DPU came up to 7.59 cents.

Distributable income to unitholders rose 23.6 per cent to $77.2 million, driven largely by a higher share of profits from associated companies, as well as higher interest income. These helped to mitigate the impact of an 11.8 per cent fall in net property income to $43.9 million.

K-Reit’s aggregate leverage as at Sept 30 was 39.8 per cent, creeping up from 39.2 per cent in the previous quarter. It has no debt expiring next year while $100 million of debt will be due for refinancing in 2013.

K-Reit’s units gained three cents on the stock market yesterday to $1.03 before the company called for a trading halt in the afternoon, pending its announcement of an acquisition. The counter resumes trading today.