Even as Keppel looks to acquire Singapore Press Holdings, Keppel REIT (KREIT) has made a strategic expansion into North Sydney, acquiring an office property under development for $322.2 million.
The acquisition will boost KREIT’s portfolio optimisation strategy, write CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei.
In a Nov 30 note, Lock and Eing are maintaining their “add” call on the REIT, with an unchanged target price of $1.29, which represents a 16.6% upside.
KREIT announced on Nov 30 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$150 million 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$327.7 million ($322.2 million).
The new property, with an approximate net lettable area of 14,000 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.
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The purchase is distribution per unit (DPU) accretive, based on a net yield of 4.5%, write Lock and Eing. “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 $9 billion, of which Australia accounts for 19.5%.”
The property is estimated to achieve practical completion in mid-2023.
In addition, KREIT will receive coupon payments of 4.5% per annum, on cumulative progress payments made during the development period. There is also a three-year rental guarantee on any unlet space after completion by the developer.
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“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,” write Lock and Eing.
UOB Kay Hian analyst Jonathan Koh is even more optimistic on the impact of the acquisition, maintaining “buy” and raising KREIT’s target price to $1.52 from $1.25 previously.
“Blue & William is able to attract tenants from the technology, media & telecommunication, professional services and insurance sectors… North Sydney is the second largest office market after the Sydney CBD in the state of New South Wales,” writes Koh.
The deal will be fully financed by additional debt, Koh adds. “Progressive payments will be made based on construction milestones. The acquisition is fully funded with AUD-denominated loans at a cost of 1.97% for natural hedge. Aggregate leverage is expected to increase slightly by 2.3ppt to 39.9%.”
As at 11.45am, units in Keppel REIT are trading 2 cents higher, or 1.80% up, at $1.13.
