Keppel REIT proposed acquisition of a 50% stake in 255 George Street for AUD363.8m from Mirvac Funds. The office building has 93% committed occupancy with an average lease to maturity of 6.8 years mostly tenanted to government agencies and a financial institution. The initial NPI yield exceeds 6%. Funded with a mix of AUD and SGD debt, pro-forma DPU accretion will be 1.4% with a higher gearing of 41%.
Maybank IB has maintained a BUY call with unchanged estimates and DDM-based TP of SGD1.00 on an attractive 6.7%
dividend yield and 40% discount to book. Tapping flight-to-core trend 255 George Street is an iconic prime building located in Sydney CBD’s highly sought after Core Precinct. The 1985-vintage freehold building underwent a AUD50m refurbishment and obtained an excellent green credential (NABERS 5.5 star energy rating). It counts the Australian Taxation Office and the Bank of Queensland as top two tenants accounting for c.87% of the NLA and has a long WALE of 6.8 years. The building has
committed occupancy of 93%. The vendor is providing a rent guarantee for existing vacancies and potential expiries. About c.13% of the purchase amount consists of such guarantees, capitalized rent incentives or abatements and committed capex.
Strategic and financial merits of the deal
The asset will benefit from flight-to-quality and flight-to-prime locations for office demand. While 150K sqm of supply is expected this year in Sydney CBD, JLL research forecasts the supply to be absorbed within 1-2 years of completion. The long WALE, quality tenants and well-spread lease expiries will give stable cash flows. Proportion of freehold assets in KREIT’s
AUM mix will increase to 36.4% from 33.2%. A mix of AUD and SGD debt priced at c.4% will fund the deal. With pro-forma gearing is above 40%, the group will seek opportunities for capital recycling. In Feb, Mingtiandi reported that KREIT was marketing T Tower in Seoul (valued SGD316.8m, 4.9% NPI yield) and the potential purchase of 255 George Street.
Maybank IB said notwithstanding the challenging macro and emerging trend of hybrid working, KREIT is focussed on Grade A CBD assets and is taking the long view of its portfolio. That said, the rental support, capitalised rent incentives, tenant concentration and elevated gearing bears watching unless capital recycling lowers the gearing. The house maintains Buy on its attractive valuation and forecasts and TP are unchanged pending deal completion.
