• Sells 20% interest in Ocean Financial Centre for S$537m (or S$3,061 psf), 2% above latest valuation and 17% higher than the original purchase price.
• Normalised exit yield of 3.1%.
• Upside risk to consensus estimates if proceeds are reinvested into a higher yield property or share buyback.
• Maintain BUY, Target Price of S$1.41.

What’s New - 

Realising value at Ocean Financial Centre

• Keppel REIT announced the divestment of a 20% interest in Ocean Financial Centre (OFC) to Allianz Real Estate for S$537.3m. This is 2.3% above the valuation as at 31 December 2017 and 18 November 2018 as well as 16.8% higher than the historical purchase cost of S$460.2m.
• Keppel REIT currently holds at 99.9% interest in Ocean Financial Centre. The sale is consistent with its strategy of optimising its portfolio and to achieve long-term sustainable returns for unitholders.
• Based on the disposal price, this translates to exit yield of 2.8% based on annualised 3Q18 NPI or 3.7% on trailing 12-month NPI. Excluding one-off pre-termination fees, the exit yield on a 12-month trailing basis would 3.1%. Note that 3Q18 NPI was depressed owing to a drop in occupancy to 95.5%.
• The disposal price also translates to a price of S$3,061 per square foot (psf), higher than the latest valuation of S$2,992 psf.
• Keppel REIT will recognise an estimated accounting gain of S$11.9m. After accounting for transaction costs of S$5m, the estimated net gain is S$6.9m.
• Net sale proceeds is estimated to be S$439.3m based on 20% of the adjusted net value of the LLP holding Ocean Financial Centre.
• The proceeds from the disposal will be used either to buy-back of Keppel REIT’s units which would be DPU-accretive, distributed as capital top-ups, repayment of debt, or to be reinvested into new properties.
• Post the sale of a 20% interest in Ocean Financial Centre, proforma NAV per unit is expected to increase to S$1.43 from S$1.41, while proforma FY17 DPU would fall from 5.70 Scts to 5.55 Scts.
• Gearing is estimated to fall to 35-36% from 39% currently if Keppel REIT uses all the proceeds to pare down debt.
• The disposal is expected to be completed in December 2018.

Ocean Financial Centre Overview

• Ocean Financial Centre is a premium Grade A development located at Raffles Place with a total net lettable area of 877,635 square feet.
• Principal tenants include BNP Paribas, Drew & Napier and ANZ.
• Committed occupancy as at 30 September 2018 stood at 95.5%

Our Thoughts

• We believe this transaction reaffirms the holding value of Keppel REIT’s portfolio, and robustness of the valuations used for its buildings. With Keppel REIT trading close to a 20% discount to book value, its valuation is attractive at current levels.
• Assuming Keppel REIT redeploys the proceeds into a higher yield property or share buyback, we believe this presents further upside to our and consensus earnings estimates.
• With Keppel REIT leveraged to the expected multi-year upturn in the Singapore office market, we reiterate our BUY call and Target Price of S$1.41.

Source: DBS Research - 30 Nov 2018