Phillip on the ground – Keppel REIT ‘s divestment of Bugis Tower October 4, 2019 1910
What’s in the news?
Divestment of Bugis Tower for S$547.5mn (contributes 6.6% of NPI), at a 6.3% premium to the latest valuation conducted on 8 August 2019. Sale price translates to an exit yield of 3%.
The sale will realise capital gains of S$388mn, +243.2% from the 2006 purchase price of S$159.5mn, to be complete mid-4Q19.
Divestment to be NAV accretive but DPU dilutive due to absence of income.
Proceeds to be used to fund share buyback, pare down debt, reinvested into new acquisitions and/or distributed as capital gains to support DPU.
Impact on KREIT
Leverage will fall 4.2ppts to 34.2%. After paying the outstanding S$90mn for the purchase of 311 Spencer Street, leverage will be c.35%.
Portfolio remains resilient post-divestment. KREIT’s portfolio will be diversified across Singapore (81.1%), Australia (15.1%) and South Korea (3.8%). Portfolio committed occupancy at 99.0%, with long portfolio WALE of 5.2 years
Recycling a high quality asset at the right time, for the right reasons. The NPI yield for the last 12 months was between 2.9% – 3.0%. With 100% committed occupancy and a long WALE of 6.2 years, the upside for this property is limited for the next few years. With office prices index at a 22-year high, KREIT is recycling the asset at an opportune time.
Lower pro forma DPU likely to be transitionary. Although marginally DPU dilutive, KREIT has plans to buy back the lower of S$100mn or 1.5% worth of units. This will reduced the number of units outstanding and channel c.S$2.85mn to the remaining unitholders. Including the S$378mn of capital gains (net of CAPEX expenditure) from this divestment, KREIT has S$483mn in capital gains to deploy, which can be paid out as capital gains to make up for the 0.04 cent (S$0.0004) dip in DPU.
Looking to Australia and Korea to reinvest proceeds. Cap rates for Australian CBD assets are 4.0% – 4.9%, while cap rates for Korean assets are c.4.5%. Divesting the asset at a low yield of 3.0% and reinvesting the proceeds in a higher yielding assets is highly accretive for the REIT. The management signalled their intention to “move quickly to reinvest the proceeds”. The management is targeting to have 70% – 75% of AUM in SG (post-divestment SG weightage: 81%).
# Phillip Securities Research does not have any recommendation or coverage of Keppel REIT.