Property Developers and their REITs (2)

Read? Property Developers and their REITs

One good example is the recent Kepland and K-REIT asset swap. The developer takes the route of higher and faster rate of returns and leaving the slower returns to K-REIT and its unitholders. Get it?

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Tue, Oct 12, 2010

The Business Times

(SINGAPORE) Keppel Land and its unit K-Reit Asia have agreed to an asset swap with transaction values totalling almost $2 billion. Keppel Land is selling its one-third stake in Phase One of Marina Bay Financial Centre (MBFC) to K-Reit for $1.427 billion or $2,450 per sq ft of net lettable area, which includes a rental support. It will reap a net gain of some $321 million from the divestment.

MBFC Phase One comprises two fully leased Grade A office towers and the Marina Bay Link Mall. Keppel Land's stake, including a rental support of up to $29 million, was valued at $1.421 billion as at Oct 5.

At the same time, K-Reit is offloading Keppel Towers and the adjacent GE Tower in Tanjong Pagar to Keppel Land for $573 million.

Keppel Land will convert both office towers into a freehold residential project and will fork out a development charge of some $5.8 million. This means the total price works out to $1,201 psf per plot ratio. Both buildings were valued at $576 million assuming they were put to residential use.

The transactions will bring Keppel Land net cash proceeds of $812 million and cut its gearing sharply. On a proforma basis, its net debt to equity ratio as at Dec 31 last year will drop to 0.5 per cent from 22 per cent.

This will support Keppel Land in its search for property deals in Singapore, China, Vietnam, Indonesia and India, said the group's chief financial officer Lim Kei Hin at a briefing yesterday.

The proceeds 'will allow us to have virtually zero debt and we will have enough fire-power in our arsenal to be able to pursue acquisitions of both residential and commercial properties,' he said.

K-Reit, on the other hand, will have to borrow $821 million from banks to pay for the MBFC stake. This is after using $570 million from the sale of Keppel Towers and GE Tower and $41.5 million from its rights issue last year for the purchase. K-Reit's aggregate leverage will rise to 39.1 per cent after the deals, up from 15.2 per cent as at June 30.

The bundled deal will be subject to the approval of Keppel Land's minority shareholders and K-Reit's minority unitholders at their respective extraordinary general meetings. Keppel Land owns a stake of 45.5 per cent in K-Reit as at March 2.

According to Mr Lim, Keppel Land got a good opportunity to acquire prime freehold land in the central business district and ride on growing demand for city living.

In particular, Tanjong Pagar has come under the spotlight as more high-end condominiums emerge in the area. Recent launches such as Altez and 76 Shenton have attracted buyers willing to splurge more than $2,000 psf. Plans to relocate the ports and the Malaysian railway station are also paving the way for rejuvenation.

The authorities have approved the conversion of Keppel Towers and GE Tower to residential use. Together, the sites have a gross floor area of 481,800 sq ft and Keppel Land plans to launch a 620-unit project there in two to three years' time, after existing office leases end.

The residential project will comprise a 45-storey tower and a 26-storey tower, with commercial space at ground level.

For K-Reit, the transactions gave it a chance to expand and upgrade its portfolio, said CEO of the Reit's manager Ng Hsueh Ling. While both Keppel Towers and GE Tower are enjoying 'good' occupancy levels, they are 19 and 17 years old respectively and will need more maintenance with time, she explained.

Meanwhile, the purchase of the MBFC stake will raise K-Reit's presence in Raffles Place and Marina Bay. Analysts have long expected Keppel Land to divest its MBFC stake to K-Reit, but some were surprised by its purchase of Keppel Towers and GE Tower. At the briefing, several also raised questions about the pricings of the deals.

Asked if K-Reit's MBFC stake purchase would be yield-accretive for unitholders, Ms Ng said that it would 'generate greater returns' but details would be released only when the circular has been lodged with and approved by the authorities.

According to Standard Chartered analysts Regina Lim and Wong Yan Ling in a note, the price K-Reit paid for the stake is above the 'consensus estimate' of $2,300 psf.

UOB-Kay Hian analyst Vikrant Pandey reckoned K-Reit might have obtained higher bids for Keppel Towers and GE Tower if there was an open tender.

Cushman & Wakefield managing director Donald Han felt that transaction prices for both the MBFC stake and Keppel Towers and GE Tower are in line with market levels. The bigger problem for investors today lies in finding deals to put their money in, he said