AmFraser - Keppel Land - Fair Value S$3.25
Keppel Land Ltd (Keppel Land) announced that it is divesting its 87.5% stake in Ocean Properties Pte Ltd (“Ocean Properties”) to K-REIT Asia (“K-REIT”) for a period of 99 years. Ocean Financial Centre (OFC) which was recently completed in April 2011 is wholly owned by Ocean Properties.
The amount receivable will be S$1,571mil after factoring in completion and post completion adjustments. Based on an agreed value of S$2,013mil or S$2,600 psf for the property, Keppel Land is obligated to provide up to S$170mil rental support till 31 December 2016 (approximately five years from completion date). Both Savills and Knight Frank have provided independent valuations of S$2,054mil and S$2,050mil respectively.
OFC is a 999 years leasehold development with a remaining tenure of 850 years. Circa 99% of net lettable area is office space at 876,947 sf with the remaining 1% retail space. Committed occupancy stands at 80% as at 15 September 2011. Some of its notable tenants include ANZ Bank, BNP Paribas, Drew & Napier LLC e.t.c. During the briefing, management has indicated that average rental rates stand at S$9 psf but is expected to surpass S$10 psf in FY12F. Interestingly, Keppel Land has a call option embedded in the contract which allows it to repossess back OFC for a nominal sum of S$1 at the end of 99 years.
K-REIT will fund the acquisition with S$603mil new borrowings and S$976mil through a rights issue on a 17-for-20 basis at S$0.85 per rights unit (17.5% discount to last done price). Both Keppel Corporation Ltd and Keppel Land have provided undertakings to subscribe for their pro rata entitlements in respect of their 76% unitholding.
We view the sale positively from Keppel Land’s perspective considering present economic uncertainties likely to exert some downward pressure on office rental rates. The transacted price is 6% above our previous assumption of S$2,450 psf and will add another eight Singapore cents to our RNAV estimates.
On a pro-forma basis, net gearing will improve from 0.38x to 0.03x. Similar to FY10, Keppel Land may pay a total gross dividend of eighteen Singapore cents (special dividend of nine Singapore cents) for FY11F in our opinion. Based on its last closing price, this will provide a yield of 6.6%.
Share price has taken a beating amid global market selldown. We have revised our RNAV estimate to S$3.25/share. Our fair value stands at parity to our RNAV estimate. We are upgrading our rating from HOLD to BUY.
DMG - TP is raised to $4.91
KepLand announced the divestment of its 87.5% stake in OFC (999-yr lease, 850 yrs lease remaining; 884,957 sf NLA) into K-REIT, priced at $2,013m translating to 2,600 psf NLA. The transaction entails income support of $170m for a period of five years, as well as a call option which effectively allows KepLand to retain its residual interest at the end of the 99-yr lease.
KepLand has committed to take-up pro-rata entitlement of K-REIT's proposed 17-for-20 rights issue (Kepland holds a 46.4% stake) at $0.85. Excluding its gain attributed to stake in K-REIT, net gain on book value amounts to c.$492.7m. The income support is expected to fill in the gap on fitting out periods, as well as lower rates that were pre-committed during the recovery phase for the recently completed OFC with avg rents c.$9 psf. Stripping out the income support from the transacted price assuming full utilisation, we derive $2,380 psf, a fair price and positive in our view considering negative headwinds in the office sector.
We believe this swift transaction pre-stabilisation of OFC reflects KepLand’s cautious stance on the office sector. Factoring in this transaction, TP is raised to $4.91 based on 20% discount to RNAV and maintain BUY. (Singapore Research)
OCBC - estimate of S$3.97
Divesting 99-year interest in OFC at S$2,600 psf. Keppel Land (KPLD) announced it would divest to K-REIT its 87.5% stake in Ocean Properties Pte Ltd (OPPL), which holds Ocean Financial Center (OFC) - a 999-year leasehold building. For this transaction, OFC is valued at S$2.01b or S$2,600 psf. Net of OPPL's liabilities, K-REIT would pay KPLD S$1.57b for the stake. Note that K-REIT only has a 99-year interest in the OPPL stake and KPLD has an option to buy back the stake for S$1 at the end of the period. In addition, K-REIT would enjoy rental support of up to S$170m until end 2016.
Market likely to view this as positive for KPLD. We believe that the market would view this transaction, which would result in a net gain of S$493m, as a positive development for KPLD. Note that this is subject to approval from K-REIT unit-holders on 10 Nov 2011and that major unitholders KPLD, KCL would be abstaining on the resolution re. the acquisition. Since OFC is currently only 80% committed at average rentals of S$9 psf, this divestment likely came somewhat earlier than expected. The price of S$2,600 psf also came nearer the high end of our estimates, exceeding other 99-year investment transactions year to date, particularly S$2,524 psf for One Finlayson Green in earlier in Mar when the office sector outlook was rosier. However, the effective price for OFC could be as low as S$2,380, depending on how much of the S$170m rental support package K-REIT would draw upon.
Fortified balance sheet and flexibility for capital deployment ahead. Through this transaction, KPLD's net debt to equity ratio would fall from 37.6% to a merely 3% which would fortify KPLD's balance sheet and give management increased flexibility for capital deployment. Given that management continues to see strong long-term prospects in Singapore and China, we believe there could be compelling opportunities for distressed assets should macro conditions deteriorate further.
Further details of transactions. The cash proceeds for this transaction to KPLD are expected to be S$1.57b. K-REIT is likely to finance this by S$602.6m debt and the remaining by equity, and would propose a 17-for- 20 rights issue at S$0.85 per unit to raise S$976.3m. KPLD would then take up its pro-rata entitlement which is S$456.5m, resulting in a net cash inflow of S$1,115m.
Maintain BUY. Pending the approval of the acquisition by K-REIT, we maintain BUY on KPLD with an unchanged value estimate of S$3.97 (20% discount to RNAV). (Eli Lee)
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