Keppel REIT’s latest acquisition offers DPU accretion, cashflow visibility

SINGAPORE (June 30): DBS is maintaining its “buy” call on Keppel REIT (KREIT) with a target price of S$1.23 following its acquisition of a 50% stake in an office tower in Australia.

The premium office tower will be developed at 311 Spencer Street, Melbourne, Australia for a consideration of A$347.8 million (RM1.15  billion).

The 42-storey tower has an estimated total net lettable area (NLA) of 717,000 sf and is strategically located between Melbourne’s CBD and new Docklands precinct with public transportation easily accessible.

Upon completion of the acquisition, KREIT will own two properties in Melbourne, the other being a 50% stake in 8 Exhibition Street.

In a Friday report, analyst Melvin Song says that the group’s total assets under management in Australia will also increase from 11% to 15%, with income contribution from the continent increasing from 18.1% to 22.8%.

According to KREIT’s estimates, assuming 311 Spencer Street was held from Jan 1 to Dec 31 2016 and an average 6.4% NPI yield for the first 15 years, proforma FY16 DPU would rise by 1% to 6.44 Singapore cents from 6.37 Singapore cents.

“However, over the coming two to three years, we anticipate near term DPU dilution (potentially 2-5% subject to the final proportion of debt drawn down and proceeds used from the sale of 77 King Street),” says Song.

KREIT will fund the acquisition through debt and proceeds from the divestment of 77 King Street in Jan 2016.

“We are positive on the expected DPU accretion in the medium term and the good cashflow visibility provided by the property given the 30-year lease and inbuilt rental escalations. However, this is balanced against some near term dilution to DPU,” says Song.

As at 12.30pm, units in Keppel REIT are trading at S$1.14. — theedgemarkets.com.sg

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