Keppel Land / K-Reit

Keppel Land / K-Reit:
K-REIT will acquire KPLD’s 87.5% stake in Ocean Financial Centre at a value of $2b, or $2,600 psf. The property is originally on a 999-year land tenure, but K-REIT is acquiring on a fresh 99-year basis, where KPLD has the option of acquiring back the interest at the end of the lease for a nominal consideration of $1.

OFC currently has a committed occupancy rate of ~80%, with passing rent of ~$9 psf/mth (negotiated during previous crisis). KPLD will provide K-REIT an income support of up to $170m over 5 yrs until 2016 to offset the current vacancy and any shortfall if the annual Net Property Income falls < $122m.

K-REIT's net consideration works out to $1.57b, to be funded by debt of $602.6m, and a 17-for-20 rights issue of 85 cts per rights share (17.5% discount to last close), to raise $976.3m of equity.
KPLD and Keppel Corp, which together own 76.3% of K-REIT have committed to take up their pro-rata entitlement. K-REIT expects the acquisition to be DPU accretive, with post-acquisition gearing at 41.6%.

Circular will be sent to K-REIT holders on 19 Oct, EGM will be held on 10 Nov.
K-REIT goes "ex-rights" on 14 Nov.
Nil-paid rights expected to trade from 21-29 Nov.
New rights shares to start trading on 13 Dec.

The deal is viewed as a positive catalyst for KPLD, as transaction capital value of $2,600 psf is higher than expectations of $2,400 psf. It is also a timely divestment ahead of potential office downturn. Market had expected the sale to take place in 1H12.
KPLD is expected to book in a net divestment gain of $492.7m (or 34 cts/share) in FY11. StanChart tips the possibility of KPLD to pay a special div of 18 cts/sh, just like it did in 2010 when it divested its one-third stake in MBDC Phase 1.
Post-divestment, KPLD will have negligible net gearing of 3% (lowest among peers), giving it ample financial strength to weather any uncertainties in the market in future, as well as to acquire assets if opportunities arise.
With a much reduced direct interest in office properties, some share price overhang may be removed. Its main direct investment now lies in its one-third stake in Marina Bay Financial Centre Phase 2, expected to be completed by end 2012.
KPLD will announce its 3Q11 results on 19 Oct.
Deutsche retains Buy with TP $3.82.
HSBC retains Overweight with TP $4.75
StanChart keeps at Inline with TP $2.86.

For K-REIT, StanChart notes the organic yield of 4.2% is attractive vs current market cap rates of 3.4%. With the income support, the yield will be boosted to 5.9%. With a cost of debt of ~2.3%, it believes the acquisition will be 12% DPU accretive in FY12. Post the acquisition, the house expects gearing to rise to 42%. However, StanChart cautions that when income support falls away at end 2016, and if office rents fall 30% and debt costs rise to the long term average of 4%, the acquisition could be dilutive to long term earnings. Maintains Underperform with TP $0.85.

K-REIT: also reports 3Q results. Distributable income came in at $26.7m, +17.7% yoy, DPU at 1.96cts, +16% yoy, for an annualised DPU of 7.78 cts or a distribution yield of 7.7%. End 3Q aggregate leverage at 39.8% vs 39.2% qoq. KREIT has no debt expiring next yr while $100m of debt will be due for refinancing in 2013. The Reit trades at 0.67x P/B.