Keppel REIT/ Keppel Land

According to Bloomberg and local press articles (Straits Times), Keppel REIT is looking for buyers for Prudential Tower. KREIT is reported to be asking $531m (S$2,400psf) for its 92.8% stake, c.10% above its Dec 31 valuation. The divestment could be used to fund an acquisition. Recall that management had stated at its 4Q results briefing KREIT is looking to sell older assets to help fund acquisitions and may approach Keppel Land to acquire its stake in MBFC Tower 3. Strong liquidity in the strata office market, reflected in the sale of Westgate office tower, could help KREIT achieve an attractive exit price. Deutsche currently values Keppel Land’s 33.3% stake in MBFC Tower 3 at $1.1bn, and in a scenario where KREIT funds the balance of the acquisition fully via debt, believe that the acquisition would be slightly accretive (3%). However, this would take gearing up to c.47%. Assuming that management keeps gearing level at 42% currently, this would imply $350m in equity fundraising, making the acquisition dilutive, suggesting a potential need for income support. Continue to see a weakening DPU trend given the fall off in income support and hence maintain Hold recommendation. Valuations are fair at 0.81xP/B and 6.6%/5.7% FY14/15 yield.