Strategic expansion into North Sydney

■ KREIT is acquiring an office property under development for S$322.2m.
■ The acquisition will boost KREIT’s portfolio optimisation strategy.
■ Reiterate Add, with an unchanged DDM-based TP of S$1.29.

Acquiring an office property under development in North Sydney

Keppel REIT (KREIT) announced that it has entered into an agreement to acquire 100% of interest in Blue & William, a Grade A office building currently under development in North Sydney. KREIT had acquired the land parcel for A$150m and has entered into a development agreement with Lend Lease Development Pty Ltd to develop the land into a Grade A office building. The total development consideration amounts to A$327.7m (S$322.2m). The new property, with an approximate net lettable area of 14k sq m, is located at the prime intersection of 2-4 Blue Street and 1-5 William Street, 160m from the
North Sydney Train Station and close to the upcoming Victoria Cross Metro Station.

The purchase is DPU accretive, based on a net yield of 4.5%

The acquisition will enable KREIT to expand strategically to the North Sydney commercial district. Including the new property, KREIT’s portfolio is expected to increase to S$9bn, of which Australia accounts for 19.5%. The property comes with advanced green features and is designed to certification standards of 5 Star Green Star Design and 5.5 Stars NABERS (National Australian Built Environment Rating System) Base Building Energy Rating. The property is estimated to achieve practical completion in mid-2023. The purchase is based on an initial net yield of 4.5% on completion. In addition, KREIT will receive coupon payments of 4.5% p.a., on cumulative progress payments made during the development period. There is also a 3-year rental guarantee on any unlet space after completion by the developer. We see the deal as positive for KREIT by locking in a well-located property at an acquisition yield of 4.5%, with little development risk and no negative carry during the construction period.

The deal will be fully funded by debt

KREIT will fully fund the acquisition with A$-denominated loans. Payment for the construction will be progressive and based on construction milestones. KREIT expects to achieve a DPU accretion of 3% when the development is completed. Post-acquisition, KREIT indicated that its aggregate leverage is expected to be approximately 39.9%.

Reiterate Add rating

We tweak our FY21-23F DPU estimates up by 0.01%-2.78% and retain our DDM-based TP of S$1.29. Potential re-rating catalysts include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of the office space.