Is the Keppel-KBS REIT Acquisition and Rights Issue Truly Beneficial to Unitholders?

by: Tam Ging Wien


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ProButterfly covered the Keppel-KBS REIT's IPO last year rather extensively last year. You may review our analysis and coverage below:

On the 24-Sep-2018, Keppel-KBS REIT announced its maiden acquisition of Seattle assets known as the Westpark Portfolio in Redmond, Washington for US$169.4mil.

The assets are valued at US$178.0mil and US$181.4mil by valuers Cushman and JLL respectively. The agreed acquisition price is therefore 4.8% and 6.6% discount to both the independent valuations.

According to the announcement, the acquisition is expected to be yield accretive based on pro forma figures with the following assumptions:

  • Portfolio has an occupancy rate of 97.7%
  • Partially funded with a rights issue of US$0.59 per unit to raise US$102.3mil
  • Resulting theoretical ex-rights price of US$0.7854

In a surprising twist, Keppel-KBS REIT announcement late Monday on the 23-Oct-2018 for a 295-for-1000 rights issue priced at only US$0.50 per unit, 15% lower than its initial assumption. This larger than expected rights would result in the theoretical ex-rights price of US$0.666 instead.

Keppel-KBS REIT also announced its latest results as of 30-Sep-2018 on 17-Oct-2018

Due to a set of disparate announcements and differing assumptions, it is difficult for many unitholders to make sense of the overall deal and what it means to them.

Here in this article, we examine the details of this rights issue and acquisition and put them together so that unitholders can better understand how it affects them.

Details of the Proposed Acquisition

The Westpark Portfolio is a business campus comprising 21 buildings in Redmond, Washington with good connectivity to key commercial hubs in Redmond and the Seattle-Bellevue area.

Source: http://www.kepkbsusreit.com/en/news_item.aspx?sid=7381&aid=8001 

The Westpark portfolio is a freehold asset and is currently 97.7% occupied with an average portfolio WALE of 4.3 years.

About 34.8% of portfolio tenants are from the high growth technology sector and another 38.2% of the tenants are in the professional services, the bulk of them which provides support services to these technology tenants.


Source: http://www.kepkbsusreit.com/en/news_item.aspx?sid=7381&aid=8001

The management provide the following rationale for the propose acquisition:

  • Deepen Presence in High Growth Seattle Market
  • Accretive Acquisition Positioned for Long Term Growth
  • Portfolio Diversification that Enhances Income Resilience

The location and portfolio appeals to tenants in the technology section due to close proximity to Microsoft World HQ and the key commercial hubs in Bellevue and Seattle.


Source: http://www.kepkbsusreit.com/en/news_item.aspx?sid=7381&aid=8001 

The annual rent in the vicinity has been growing over the years and is expected to continue to through 2018 and 2019.

The acquisition of Westpark portfolio is also expected to increase diversification through the enlargement of the AUM, tenant base and increase in overall portfolio occupancy.


Source: http://www.kepkbsusreit.com/en/news_item.aspx?sid=7381&aid=8001

Details of the Rights Issue

To finance the proposed Westpark portfolio acquisition, the management proposes to undertake a 295-for-1000 renounceable rights issue priced at US$0.50 per unit and issue 186,236,224 new units to raise gross proceeds of approximately US$93.1mil.

Keppel-KBS REIT closed the week at US$0.69 per unit the week prior to the announcement. This means that the rights issue price of US$0.50 per unit represents a discount of 27.5% to the previous week closing price and 24.9% discount to the theoretical ex-rights price of US$0.666.

Out of the US$93.1mil expected to be raised, approximately US$89.7mil will be used to partially fund the acquisition of Westpark Portfolio while the remaining are used to pay the fees and expenses incurred in the fund raising.

The indicative timetable of the rights issue is provided below:


Source: http://www.kepkbsusreit.com/en/news_item.aspx?sid=7381&aid=8177

Putting the Acquisition and Rights Issue Together

Using information from Keppel-KBS REIT’s latest financial results, details of the acquisition as well as details of the rights issue, we can now start to stitch together a holistic picture of what this deal would mean to unitholders.


Source: REITScreener Research, ProButterfly Research

The increase in NAV is estimated by adding the difference between the valuation of the Westpark Portfolio and the total debts incurred in the acquisition. This results in an increase of approximately 14.5%.

The units are increase assuming all the rights are taken up according to the 295-for-1000 ratio – in other words, the total unit base will increase by 29.5%.

The DPU forecasted are based on annualisation of its financial period since listing on the 09-Nov-2017 until its latest reported results on 30-Sep-2018. The DPU forecast of the enlarged portfolio was estimated based on the pro forma DPU figures provided in the acquisition announcement. DPU is expected to fall 3.38%.

Gearing is also expected to increase from 33.0% to 35.3%.

There is no significant change in the yield based on the theoretical ex-rights price of US$0.666.

What We Think of the Deal

Based on the closing price of US$0.54 at the time of writing, the yield is forecasted to be 11.14%. Certainly with such a steep fall in price from US$0.69, the market is viewing this deal negatively.

If viewed from its IPO price of US$0.88, the fall represents a 38.6% capital loss. We have previously covered the IPO of Keppel-KBS REIT <https://www.probutterfly.com/blog/analysis-of-keppel-kbs-us-reit-ipo> and it may serve unitholders to review the assumptions made at that point of time.

As a result of this deal, NAV per Unit is dilutive owing to the fact that the base units are increased by 29.5%, much more than the NAV gain of 14.5%. From a DPU perspective, the deal is also dilutive on a per unit basis, falling from a forecast of US$0.06224 to a US$0.06013 – a fall of approximately 3.38%.

Gearing will also increase by 2.3% to 35.3%. This will also likely result in higher interest cost.

Based on our analysis and assumptions above, we certainly concur on the negative view of the market in the short term.

The deal while not as severe an impact to unitholders compared to the recent acquisition and rights issue proposal made by OUE Commercial REIT’s acquisition of OUE Downtown, it not beneficial to unitholders in the short term.

In the longer term, perhaps the high growth tech sector will help to grow Keppel-KBS REIT’s portfolio returns organically contributing to higher DPU and higher NAV per Unit. That’s assuming that the manager doesn’t make another net dilutive rights issue and acquisition before the portfolio has time to fully revert to its current DPU.

All eyes will be on the REIT manager going forward on how it manages its future acquisition pipeline.

 

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If this article has really benefited you, then you would certainly love to check out our most popular post related to REITs and Business Trusts. We hope that you will gain much insight from ProButterfly's coverage of this sector:

 

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