Shares in K-Reit Asia, a Singapore-listed real estate investment trust focusing on commercial buildings, gained 1.1% yesterday as the company provided further details of its acquisition of an office tower in Singapore’s central business district at an estimated cost of S$1.57 billion ($1.2 billion) and the proposed rights issue that will provide part of the funding.
The gains, which followed a 9.7% drop in the share price to a 12-month low on Tuesday, came as Moody’s changed its outlook on K-Reit’s Baa3 credit rating to positive. The rating agency said it views the acquisition as “mildly positive” as it will result in “a much strengthened property portfolio, though at the expense of somewhat higher leverage.”
Among the positives resulting from the transaction, it said, is an increase in the weighted average lease expiry to seven years and the fact that the financing of the acquisition will comprise a balanced combination of equity and debt (62% will come from the rights issue).
“The change in outlook finally also reflects K-Reit’s operating and financial resilience, as evidenced by its strong, predictable cashflows and high occupancy rates over the past years. Its track record and prudent approach towards managing its capital structure and pursuing acquisitions after the 2008/09 economic downturn also help maintain a solid financial profile,” Moody’s said.
The acquisition and the rights offering, which were first announced on Monday evening, needs the approval of K-Reit’s unitholders and a circular detailing both issues were published yesterday. An extraordinary general meeting will be held on November 10.
K-Reit is proposing to raise S$983.8 million ($774 million) from a 17-for-20 rights issue. Temasek-backed Keppel Corp and Keppel Land, which together own 76.3% of the trust, will take up their full entitlements and the remaining 23.7% will be underwritten by DBS and United Overseas Bank.
The new units will be offered at a price of S$0.85 apiece, which translates into a 17.5% discount to Monday’s closing price of S$1.03 and a 10.3% discount to the theoretical ex-rights price (Terp) of S$0.947. It also represents a 42.6% discount to the S$1.48 net asset value per unit, as per the end of December 2010.
The discount is tight compared to most other rights issues, including those by Hong Kong-listed New World Development and New World China Land that were announced on Tuesday and offer discounts to Terp of 28% and 25.1% respectively. Singapore-listed Lippo Malls Indonesia Retail Trust, which launched a $256 million rights issue two weeks ago to fund the acquisition of two shopping malls, is offering the new units at a 27.1% discount to Terp, based on the closing price before the deal was announced.
However, this isn’t the first time K-Reit has raised capital through a tightly priced rights issue to fund an accretive acquisition. In October 2009 it successfully raised S$620 million from a one-for-one rights offering that was priced at an 11.8% discount versus Terp. Some 80% of the proceeds from that deal, which was arranged and partly underwritten by BNP Paribas, were used to repay a bridge loan taken up in connection with the acquisition of six strata floors of Prudential Tower in Singapore.
A tight discount makes it easier to use the funds for accretive acquisitions, which is positive for existing unitholders. On the other hand, it may make it more difficult to attract new investors, who can participate in the rights issue via nil-paid rights sold by existing unitholders in the open market.
This may explain part of the negative market response to the Monday announcement, although another reason for that could be the significant dilution of the existing share capital. The rights issue will increase the number of units in issue by 85% and would have reduced the December 2010 NAV to S$1.19 per unit from S$1.48, according to a proforma estimate. However, according to K-Reit, the acquisition will be immediately dividend accretive and in the circular issued yesterday it projected that the forecast 2012 dividend per unit will increase by 2.3% to 7.16 cents.
The acquisition comprises an 87.5% stake in Ocean Properties, which owns the 43-storey Ocean Financial Centre that is one of the largest and newest office developments in Singapore’s central business district. The building also has a variety of environmentally sustainable features. As of September 15, just under 80% of phase one had been pre-leased to companies such as ANZ Banking Group, BNP Paribas, Drew & Napier and Stamford Law Corporation. Phase two is scheduled for completion by the end of 2012.
K-Reit’s stake in Ocean Properties, which was bought from a wholly owned subsidiary of Keppel Land, is valued at approximately S$2.01 billion, including borrowings and a five-year rental support from the vendor. The deal will increase the size of K-Reit’s property portfolio to S$5.9 billion from S$3.9 billion. Following the transaction, it will own interests in eight Grade A commercial properties, of which five are in Singapore and three in Australia.
Assuming the unitholders approve the rights issue, the units will start trading ex-rights on November 14. Trading of the nil-paid rights will be open from November 21 to 29 and the subscription period for the rights units will close on December 5.
