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

Commentary #

• 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.