An Australian Deal at 3.0% DPU Accretion

• Keppel REIT (SGX:K71U) is deepening its Australian footprint with an AUD327.7m (S$322.2m) acquisition of Blue & William, a Grade-A office property in North Sydney, under development till mid-2023, at a 3.0% DPU accretion. We expect the transaction structure to underpin near-term DPU visibility, while the property, well-sited in NSW’s second largest office market, suggests a stronger medium-term rental growth outlook, and valuation upside.
• Office demand tailwinds have strengthened Keppel REIT’s fundamentals, but DPU growth stays unexciting versus peers.

Expanding Beyond Sydney CBD

• The ~152k sf NLA property is located in North Sydney, NSW’s largest office market after the Sydney CBD, and preferred by TMT, professional services and insurance sector occupiers (according to Knight Frank). It sits ~160m from the North Sydney train station and 350m from the upcoming Victoria Cross metro station, which when opened in 2024, should cut journey times to the Sydney CBD to 3-5mins.
• Vacancies rose to 24.5% in 2020, from 7.9- 10.1% in 2016-2019, but tightened to 20.7% in 9M21 from improving leasing demand, and we expect limited new supply until 2024 to cushion rents.

Deal Structure Underpins DPU Visibility

• The acquisition is targeted to be completed by end-2021, and management is projecting a 4.5% initial NPI yield for the property upon its practical completion in mid-2023, with a 3-year rental guarantee provided by developer Lendlease on unlet space afterwards. The transaction will be fully debt-funded by AUD borrowings at 1.97%, with coupons at 4.5% p.a. to be received (from Lendlease) and applied to reduce cumulative progressive payments to be made based on construction milestones during the development period, underpinning DPU visibility in the near term.

Gearing Healthy, Looking to Add More

• Keppel REIT’s AUM should rise to S$9.0b with 11 properties in Singapore (77.1% of AUM), Australia (19.5%) and South Korea (3.4%), while freehold assets prefer CapitaLand Integrated Commercial Trust (SGX:C38U), with catalysts from DPU recovery, and redevelopment upside.

Source: Maybank Kim Eng Research - 1 Dec 2021