News Analysis: Cyber Monday shopping!

  • Keppel REIT announced the acquisition of Blue & William, a freehold Grade A office building under development located in North Sydney, Australia for A$327.7m (S$322.2m)
  • Estimated initial NPI yield of 4.5% with 3-year rental guarantee with established leasing criteria. Pro-forma DPU accretion of c.3%.
  • We view this acquisition positively (though recognised that yield is tighter than previous acquisition) and believe KREIT is setting a new asset recycling paradigm at top speed.
  • Maintain BUY; TP of S$1.40. 

Keppel REIT announced the acquisition of Blue & William, a freehold Grade A office building under development located in North Sydney, Australia for A$327.7m (S$322.2m). The acquisition will be fully debt funded. 

The acquisition will increase its Australia portfolio to 19.5% from 16.4% by AUM and 32.6% by NLA.

Key details of the acquisition:

  • Total Development Consideration: A$327.7m (S$322.2m)
  • “On Completion” valuation: A$327.8m (S$322.3m) 
  • Total acquisition cost (including transaction costs): A$342.9m
  • Estimated NLA: 14,133 sqm (152,128 sqft)
  • Initial NPI Yield: 4.5% with 3-year rental guarantee on any unlet space after completion. We understand that there is an established leasing criteria to ensure the quality of the tenants. The criteria includes WALE of 5 years, cap and collar on the target rents and type of tenants with credit quality checks.  
  • Acquisition will be 100% funded by debt
  • Pro-forma DPU (assuming completion) is estimated at 3% 
  • Pro-forma gearing is estimated to increase to 39.9% vs 37.6% as at 30 Sep 2021
  • The acquisition is expected to be completed by end 2021
  • Estimated completion of the development would be mid-2023
  • Developer: Lendlease
  • The site is approximately 160m from the North Sydney Train station which connects directly to Wynyard Station and Central Station in Sydney CBD. With the completion of the upcoming Victoria Cross Metro Station (about 350m from the site) in 2024, commuting time to Barangaroo and Martin Place in Sydney CBD will be reduced to 3 mins and 5 mins respectively. 
  • Given the building is designed to green certifications, withholding tax will be reduced to 10% from 15%. 
  • Management plans to target media and tech tenants (similar to the tenant profile in North Sydney) and estimates WALE to be c.5 years with rental escalations of 3% to 4%
  • KREIT will disburse A$150m at the start while the rest will be disburse progressively during the construction period. The amount disbursed will earn 4.5% coupon during the construction period. 
  • Target gross rents ranges around A$900 to A$1000psf with net effective rents close to market rents at c.A$700psf (3Q21 market rents are at A$656psf).

Our Views

KREIT charged ahead with its asset recycling strategy at great speed compared to its peers. Shortly after delivering 2 acquisitions in FY2020 and divesting its 50% stake in 275 George St in July 2021, KREIT has inked another accretive acquisition before the year ends. Indeed setting a new Keppel paradigm of portfolio optimisation and asset recycling strategy.

We view the acquisition as a positive addition to KREIT’s portfolio delivering c.3% accretion upon completion and good portfolio metrics that would ensure earnings visibility in the medium term. Admittedly, the initial yield is much tighter than its previous acquisition of Pinnacle Office Park at Macquarie Park Sydney at 5.25% yield. We believe the asset is well-located “suburban” office / business campus at city fringe would be a much sought after by prospective tenants. It has good connectivity that connects Sydney CBD in less than 10 mins. Hopefully the completion of the asset is timely to catch the potential recovery post COVID-19 pandemic.  

This is indeed a big welcome to the new CEO indeed!