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K-REIT: Swap agreement.

Monday, October 11, 2010

"Keppel Land, the Singapore- based developer controlled by Keppel Corp., agreed to sell its stake in the first phase of Marina Bay Financial Center (MBFC) to K- REIT Asia for $1.43 billion, as part of a swap agreement...

"Keppel Land will buy two properties, Keppel Towers and GE Tower (KTGE), from K-REIT for $573 million for redevelopment into about 620 premium residences."

What does this mean for K-REIT?

On 24 Sep, in "FCOT, CCT and K-REIT", I mentioned that "K-REIT closed at $1.31 today. NAV as of Jun 10 at $1.47. K-REIT is trading at an 11% discount to NAV. Gearing ratio is at 15.2%.  This is very attractive to me as it gives the REIT plenty of room to leverage up for potential yield accretive purchases. 1Q 2010 DPU at 1.33c.  Annualised DPU should be 5.32c which means a yield of only 4% based on the current price of $1.31.  K-REIT has, arguably, the strongest balance sheet amongst the three office property REITs discussed here.  The low yield might put off investors but its low gearing paves the way for future acquisitions which could bump up its DPU." Well, it has happened.

Some effects of the swap agreement:

1. The aggregate leverage of K-REIT after completion of the MBFC Acquisition and the KTGE Divestment is approximately 39.1%.

2. K-REIT’s weighted average debt maturity profile will be extended to approximately 4 years. In addition, the portfolio’s average borrowing cost will also be reduced from 3.54% to approximately 3.05%.

3. Weighted Average Lease to Expiry (WALE) from 5.7 years as at 30 June 2010 to 7.8 years.

Read announcement here.

The actual DPU forecast following the completion of the transactions will be disclosed in the Unitholder Circular which is not available yet. Will this swap agreement be DPU accretive?  It should be since we are seeing a more than doubling of gearing ratio from 15.2% to 39.1% and a boost to K-REIT’s assets to about $3.4 billion from $2.5 billion.


-.-' said...

Hi AK, if you read the Presentation slides by the K REIT MAnagement, you will realise that the Lease Tenancies of the GE Towers and Keppel TOwers are expiring this and next year.

Given that office rents are expected to climb between 20-30% next year, K REIT will not be able to capitalise on this upside if they were to sell the Assets to Keppel Land. Instead, it will be Keppel Land who would end up in a more advantageous position as they are only likely to redevelop the building closer to 2017 when the Lease for the Keppel Harbour expires and the Land is taken back by the Government for redevelopment into a waterfront residential area.

K REIT would be left out in the cold by paying an exorbitant price for MBFC and selling those 2 freehold land at a bargain price to Keppel Land. In the event of another property downturn, K REIT will be in a precarious position.

ALthough there maybe some improvement in the DPU, this is only temporary due to the income support provided by Keppel Land and subject to a maximum of 29million. Once that 29million has been utilised, the DPU will drop acoordingly as the leases for the tenancies signed were done in 2009 at below market prices. The Average Lease Expiry for MBFC for the tenancies are around 3-5years.

As K REIT is highly geared post asset swap, there is not much headroom to grow the DPU further. On top of that, shareholders will suffer a dilution from the issuanace of 14million K REIT Units to the management.

The way the asset swap is arranged, it looks more of a Win-Lose situation.

AK71 said...

Hi -.-,

How do I pronounce your nickname? ;)

You make perfectly good sense. It seems that K-REIT has gotten the shorter end of the stick.

I only have a very small position in K-REIT bought during the Jurassic Age. Time for an exit strategy perhaps.

Thanks for this very insightful comment. :)

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