Over the weekend, Keppel REIT (SGX: K71U) announced that it had entered into an agreement with the Goodman Group to acquire a commercial property in Sydney, Australia.
As a recap, Keppel REIT owns a portfolio of premium grade A commercial assets in prime business and financial districts within Asia. Total assets under management (AUM) stood at around S$8 billion as of 30 June 2020.
This acquisition is expected to further improve the characteristics of the REIT’s portfolio and add another feather in its burgeoning cap.
Details of the acquisition
Keppel REIT is looking to acquire a 100% interest in Pinnacle Office Park for A$306 million (around S$303.3 million).
This is a Grade A commercial property consisting of three office buildings located within Macquarie Park in Sydney.
The property has a net lettable area of around 35,000 square metres and is 96.3% committed.
The total number of tenants for all three buildings is 14, and the property has a weight average lease expiry (WALE) of 4.8 years.
The properties are accessible via a metro station and nearby major bus interchange and are also well-served by public transportation and road links into the CBD area.
Here are four reasons why we like this acquisition.
1. Accretive acquisition
One key benefit of the acquisition is that it will help to lift the REIT’s distribution per unit (DPU).
The DPU is a key attribute that income-seeking investors look at as the key reason why they invest in REITs in the first place.
This acquisition will be fully funded by debt, and the REIT will take up an A$-denominated loan to avoid currency risk.
Assuming the acquisition was completed on 1 January 2019, the pro-forma DPU accretion will be around 4.5% from S$0.0558 to S$0.0583.
Once completed, Keppel REIT’s gearing ratio will rise to 38.7%, based on the leverage as of 30 June 2020.
The debt level is still well within the threshold of 50% set by the Monetary Authority of Singapore.
2. Geographic diversification
Prior to the acquisition, the REIT has had the bulk of its assets concentrated in Singapore.
As of 30 June 2020, 80% of the REIT’s properties were located in Singapore, with 16.3% in Australia and the remaining 3.7% in South Korea.
With the acquisition, it will bump up Keppel REIT’s Australian exposure to 19.4% and bring down its Singapore exposure to 77%.
Upon completion of the deal, the REIT’s AUM will increase to S$8.2 billion, with Pinnacle Office Park making up 3.8% of the enlarged AUM.
This diversification is beneficial for the REIT as it improves income stability and helps to dilute down Singapore’s contribution, albeit slowly.
3. Improves portfolio metrics
The acquisition will improve the freehold portion of the portfolio from 30.3% to 37.1%, a plus point as a short land tenure may mean the properties could lose their value as the tenure expires.
Committed occupancy for the overall portfolio remains high at 98.5% and should remain resilient even in the face of the pandemic.
Portfolio WALE remains long at 6.9 years and around 17.2% of leases are due for renewal this year and in 2021.
Also, all leases for the Pinnacle Office Park properties have built-in annual rental escalation clauses of between 3% to 4%.
These clauses ensure that rents can keep up with inflation rates over the long-term.
4. Redevelopment potential
One of the three buildings within the office park, 6 Giffnock Avenue, has the potential to be redeveloped into a new office building in future.
This project will be subject to approval from the local authorities, and if approved, will result in the building’s net lettable area (NLA) increasing substantially.
The building’s current NLA is 3,940 square metres but is projected to more than quadruple to 17,000 square metres if the redevelopment proceeds.
This project will add approximately 37% to Pinnacle Office Park’s overall NLA.
This move could significantly increase the overall rental income from these properties due to the increase in overall NLA and would provide a boost to the REIT’s gross revenue and, perhaps, even its DPU.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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