• Keppel REIT has entered into an agreement to acquire Blue & William, a freehold Grade A office building under development in North Sydney for A$327.7m. The property provides coupon of 4.5% on cumulative progress payments during the development phase and NPI yield of 4.5% after practical completion. The acquisition will boost pro forma 2020 DPU by 3% and is fully funded by A$-denominated loans.
• Risk of merger with SPH REIT (SGX:SK6U) was averted. Maintain BUY call on Keppel REIT.

Expanding Footprint Down Under

• Keppel REIT (SGX:K71U) has entered into an agreement to acquire Blue & William, a freehold Grade A office building with NLA of 14,133sqm under development in North Sydney for A$327.7m. The property is being developed by Lendlease, an integrated real estate and investment company headquartered in Australia.
• Protected by three-year rental guarantee. Lendlease will provide coupon of 4.5% on cumulative progress payments during the development phase. The property continues to provide net property income (NPI) yield of 4.5% after practical completion. Lendlease will provide a three-year rental guarantee on any unlet space after practical completion. Practical completion for Blue & William is estimated in mid-23.
• Organic growth from built-in rental escalation. Blue & William is able to attract tenants from the technology, media & telecommunication, professional services and insurance sectors. It provides built-in rental escalation of 3-4% post practical completion.
• Close proximity to key transportation nodes. North Sydney is the second largest office market after the Sydney CBD in the state of New South Wales. Blue & William is located at the junction of Blue Street and William Street and 160m from the North Sydney Train Station. It is 350m from the upcoming Victoria Cross Metro Station, which will reduce commuting time to Barangaroo and Martin Place in the Sydney CBD to three minutes and five minutes respectively, when completed in 2024.
• Built with best-in-class advanced green features. The property is designed to achieve the 5 Star Green Star Design and As Built Rating by the Green Building Council of Australia and 5.5 Stars Base Building Energy Rating by the National Australian Built Environment Rating System (NABERS). The property’s green credentials would ensure withholding tax is reduced from 15% to 10%.

Increase Geographical Diversification by Scaling Up in Australia

• Keppel REIT’s AUM is expected to expand natural hedge. Aggregate leverage is expected to increase slightly by 2.3ppt to 39.9%.

Raised Keppel REIT's DPU Forecast for 2022 and 2023

• We raised our existing DPU forecast for Keppel REIT in 2022 and 2023 by 1.8% DDM (cost of equity: 5.5% (previous: 6.25%), terminal growth: 1.5%).

• Catalysts:
  • Positive rental reversion for office properties in Singapore.
  • Full-year contributions from Victoria Police Centre (311 Spencer Street) in Melbourne and Pinnacle Office Park in Sydney in 2021.

Source: UOB Kay Hian Research - 1 Dec 2021