Hopes fade for Keppel REIT's MBFC T3 acquisition in 2013

Not yet fit to fund SGD1.1b property.

According to Maybank Kim Eng, it estimates that the commitment rate at MBFC Tower 3 now stands at 90% or slightly more, effectively making the property ripe for KREIT to acquire. However, given KREIT’s high gearing of nearly 45%, Maybank thinks the market conditions are not favourable enough for KREIT to raise substantial equity to fund the c.SGD1.1b acquisition.

"Therefore, we think the probability of the transaction going through in 2H13 has diminished," says Maybank.

Here's more:

No significant uplift expected. KREIT will be reporting its 2Q13 results on 15 July. We expect 2Q13 DPU to be largely in line with that of 1Q13’s, coming in at ~1.97 cts/unit.

The second half could be marginally better with the completion of the acquisition of 8 Exhibition Road in Melbourne, Australia, expected in August. We have lowered our target price to SGD1.15 after ascribing a higher risk-free rate of 3% and a higher cost of equity of 8.2%.

2Q expected to be a stable quarter. With only 3.5% of KREIT’s portfolio NLA due for renewal for the whole of FY13, we expect little change in occupancies and passing rents in 2Q13. The portfolio was already operating at a high occupancy rate of 98.8% as at 1Q13, and we expect marginal improvement at Ocean Financial Centre from its 96.6% occupancy.

Australian acquisition expected to complete in August. On 26 June, KREIT announced that it will be acquiring a 50% stake in 8 Exhibition Street, a Grade A office property in Melbourne, Australia, with an NLA of ~480,309 sq ft for a consideration of SGD192.4m.

Already completed and 100%-leased, the acquisition is expected to be DPU-accretive, although the details of the funding structure will only be known later upon the completion of the deal, expected to be around 1 August 2013.

We are currently assuming it will be fully debt-funded, given the recent volatility in the equity market.