e believe that the acquisition price of S$285.7m or S$2600 psf including income support for additional 12.4% stake in Ocean Financial Centre does not fully factor in the weakness in office rentals. While the acquisition will be DPU accretive, the risk of additional dilutive equity fund raising is heightened as the gearing post the transaction would rise to 43.9% near the critical 45% threshold that could result in a credit rating downgrade. We maintain our HOLD call on KREIT with a higher target price of S$1.02 (from S$0.95) incorporating the additional stake in OFC and the tax transparency for MBFC Phase 1. Key highlights are as follows:
Do let me or Terence know in case you need any further details.
Warm Regards,
Vikrant
Ph: 65906623
KREIT - Bumping up its stake in OFC; Maintain HOLD with a higher target price of S$1.02 (from S$0.95)
Analysts: Vikrant Pandey/Terence Khi Tel: (65) 6590 6623/ 6590 6614
· Bumping up its stake in Ocean Financial Centre (OFC). K-REIT Asia (K-REIT) announced the acquisition of an additional 12.39% stake in OFC for is S$285.7m, or S$2600 psf, including income support of S$24.1m. Excluding income support, the acquisition cost is S$261.6m, or S$2380 psf. This acquisition increases K-REIT’s stake in OFC to 99.9% from 87.5% previously. OFC has an NLA of 887,423 sf and occupancy of over 90%. · Financed through new debt issuance and private placement at a 15% premium to share price. The acquisition will be financed through additional bank borrowings of S$158.2m and a private placement to raise gross proceeds of S$70.2m through the issue of 60m new K-REIT units to the vendor at an issue price of S$1.17 per unit. K-REIT has managed to raise 60m in additional equity at S$1.17, a rare 15% premium to its last traded share price of S$1.02.
· DPU accretive with income support. The acquisition will be DPU accretive, boosting 2012F-2014F DPU by 1.3%-2.7%. The vendor will also provide income support of S$24.1m, supporting an acquisition NPI yield of 4.7% until end-2017.
· Acquisition price not fully factoring in the weakness in office rentals. Acquisition price is equivalent to K-REIT’s initial acquisition cost of S$2,013m or S$2,380 psf excluding income support for its 87.5% stake in OFC in 4Q11. The Grade-A office rentals in Singapore have seen a 3.6% qoq correction to S$10.60 psf pm since then. While the office capital values have held up despite the correction in rentals, further weakness in rentals could adversely impact asset values.
· Threat of additional equity fund raising with gearing of 43.9%. Gearing post acquisition and the placement would rise 2.1ppt to 43.9% from 41.8% in 1Q12. Though this is still well within the 60% gearing limit, the threat of additional equity fund raising is raised as K-REIT nears the 45% gearing limit that could result in a credit rating downgrade. Our sensitivity analysis indicates that every 10% fall in asset values would imply 4.8 ppt rise in gearing.