S-REITs go shopping overseas

The investment will be fully funded with Australian dollar denominated loans for natural hedge, with progressive payments to be made based on construction milestones. Keppel REIT has also said that the Independent Valuer has assessed that the target rental rate on which the Rental Guarantee is calculated is in line with market rents.

The total cost of the development is divided into a couple of parts. Keppel REIT will pay A$143 million for the land this year, and a further A$7 million just before completion, sometime in June 2023.

Progress payments for the development will be paid to Lendlease which in turn will pay Keppel REIT a coupon of 4.5% a year based on the aggregate amount of progress payments Lendlease receives, till completion.

Keppel REIT’s manager has indicated that its Australian dollar debt will likely 1.97% a year. This is marginally lower than Keppel REIT’s average cost of debt as reported on Sept 30, 2021 of 1.99%. As a result, the transaction is likely to be accretive to distributions per unit (DPU) to the tune of 3% based on FY2020’s DPU of 5.73 cents, raising it on a pro forma basis to 5.9 cents. Keppel REIT’s 1HFY2021 DPU for the six months to June 30 was 2.94 cents, translating into an annual DPU of 5.88 cents. Since the acquisition is financed by debt, aggregate leverage rises from 37.6% as at Sept 30, 2021 to 39.9%.

See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM

According to JLL Research, North Sydney recorded its third consecutive quarter of positive leasing demand in 3Q 2021, with new and refurbished buildings continuing to be drivers of leasing activity. With no new significant supply anticipated for North Sydney until 2024, the market is well placed to absorb the current availability of stock and drive vacancy down, Knight Frank says. The completion of the new Victoria Cross Metro Station in 2024 will also enhance connectivity to North Sydney and support future demand in the market, according to JLL.

The transaction begs the question as to why Lendlease did not or could not have accessed the construction loan on its own, instead of paying Keppel REIT a coupon of 4.5%. The Australian press has reported that Lendlease plans to restructure, resulting in right-sizing including staff count.

A tried and tested structure

See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM

Nonetheless, the structure Keppel REIT is adopting has been tried and tested. "This structure is not uncommon in Australia. Our earlier investment in 8 Chifley Square and other transactions by S-REITs are also largely similar in nature. Blue & William presents a good collaboration opportunity for Lendlease to develop and for Keppel REIT to own the office property," says a Keppel REIT spokeswoman.

In 2013, Suntec REIT had a similar arrangement with Leighton Properties (now known as CIMIC) at 177-199 Pacific Highway, also in North Sydney. At the time, Suntec REIT paid A$413.2 million which was the equivalent of $457.9 million in 2013. Leighton developed the property, and paid Suntec REIT a coupon of 6.32% during the construction period. Suntec REIT drew on a $500 million five-year loan and paid for the property based on percentage of completion.

The difference was that 177-199 Pacific Highway was 100% committed at the time of purchase, with Leighton Properties taking up 76% of the property, and it provided a rental guarantee to Suntec REIT for four years.

Despite the questions around Lendlease’s issues, Keppel REIT’s new site is prime, at the intersection of 2-4 Blue Street and 1-5 William Street, and is 160m from the North Sydney Train Station. With the upcoming Victoria Cross Metro Station, which will be located about 350m from the property when completed, commuting time to Barangaroo and Martin Place in the Sydney CBD will be reduced to approximately three minutes and five minutes respectively.

“The investment will see Keppel REIT expand strategically into North Sydney, a major commercial district with positive leasing dynamics. Designed with tenant experience and wellness as a priority, Blue & William, which will include advanced green features and offer panoramic views of the Sydney Harbour Bridge, is set to be the preferred business address for corporates,” says deputy CEO of and head of investment at Keppel REIT’s manager Shirley Ng.

North Sydney is the second largest office market in New South Wales after the Sydney CBD. It is also the location of choice for diverse industry sectors — including technology, media and telecommunication — as well as the professional services and insurance sectors.

The problem with Keppel REIT is not its portfolio, but corporate action on the part of its sponsor Keppel Corp. Keppel REIT’s unit price had been under some pressure from August to October because Keppel Corp had planned to use Keppel REIT units as part payment for the acquisition of Singapore Press Holdings (SPH). This would have placed Keppel REIT under more pressure as some 26% of Keppel REIT’s units would be divided between 60,000 retail shareholders of SPH.

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“The probability of Keppel REIT and SPH REIT merging to prevent conflict of interest has been reduced substantially. Keppel REIT is likely to maintain its status and the attached premium as a pure play on office,” suggests a recent report by UOB Kay Hian. As a result, UOB Kay Hian has raised Keppel REIT’s target price to $1.52, and is also raising its forecast DPU for 2022 and 2023 by 1.8% and 2.5% respectively due to contributions from Blue & William. Blue & William will have an NLA of about 14,000 sq m.

On completion, Keppel REIT’s assets under management (AUM) will grow to $9.0 billion across 11 properties in Singapore (77.1% of AUM), Australia (19.5% of AUM) and South Korea (3.4% of AUM), and the proportion of freehold assets in its portfolio will increase from 30.1% to 32.6%11 (by NLA).

FLCT opts for byte-size

Frasers Logistics & Commercial Trust’s (FLCT) manager has announced a similar transaction to Keppel REIT’s in that it is a ‘forward’ acquisition. FLCT is acquiring a new warehouse in Worcester Six, a new business park in the West Midlands, from an unrelated third party. FLCT will fund the development of the new facility which will cost GBP28.3 million ($51.3 million) on a completed basis with debt. FLCT’s announcement points out that the valuation, done by CBRE is based on the income capitalisation approach and comparable market transactions. The development of the property is expected to be completed in the first quarter of 2023.

The new property will be FLCT’s second warehouse property in the UK, increasing FLCT’s exposure to the UK market to 10.9% of its total portfolio value, from 10.2% previously. The transaction will also lift the weighting of FLCT’s portfolio by value towards logistics and industrial which will increase from 61.1% to 61.4%.

The property, when developed, will be a modern and high quality facility with a total lettable area of 180,121 sq ft (approximately 16,734 sq m) on a 3.48 hectare site, positioned near the near the entrance to the business park with extensive frontage to the access road.

Upon completion of the development, the property will be leased to Alliance Flooring Distribution, a unit of London Stock Exchange-listed Victoria, for 15 years, subject to five yearly upward only rent reviews.

Lower accretion for MUST

Manulife US REIT (MUST) has had a challenging pandemic, but is in the mood for some action. On Nov 30, it launched a placement, and upsized it to raise $100 million. As a result it issued 154.08 million units at US$0.649 ($0.89) per unit. With the additional new units, MUST’s acquisition of three campus style properties in Tempe and Phoenix (both located in the state of Arizona) and Portland in Oregon, is accretive to the tune of 2.8% according to an MUST spokeswoman, compared to the 4.4% illustration in MUST’s Nov 30 announcement.

Excluding expenses, the three properties cost US$201.6 million. The Tempe property was acquired at an implied capitalisation rate of 6.9%, the Phoenix property at 5.8% and the Portland property at 7%.

Jill Smith, CEO of MUST’s manager, says the acquisitions marks MUST’s move into high growth magnet cities, with properties which have high growth tenants in the tech and healthcare sectors, and above all, the transaction is accretive.

Although the properties are suburban compared to MUST’s nine office buildings, Smith draws attention to the Portland acquisition which counts footwear and apparel company Nike as a tenant. “Nike uses the space to shoot their advertisements and [are able] to bring in sports celebrities because the building is ideally suited for sneaking celebrities in beyond the lens of the paparazzi,” she says.

While the videos show fantastic campuses that must surely be attractive to the young, MUST has had a challenging two years in terms of performance. Perhaps these properties will help to boost DPU, which based on annualised 1HFY2021 figures is likely to be 5.4 US cents. A 2.8% accretion would boost full year DPU to 5.55 US cents says the spokeswoman. At the post-placement price of 68 US cents DPU yield is at 8.1%. That is a good yield. But would investors suffer foreign exchange leakages and perhaps, capital loss through lower prices as US bond yields rise?

Of the three acquisitions announced in the week of Nov 29 to Dec 3, Keppel REIT’s looks the most attractive despite Lendlease’s restructure in Australia. Keppel REIT’s problem is its sponsor, the tussle for SPH and the potential dividend-in-specie of a 26% stake in Keppel REIT.