“With limited CBD office supply and a continued flight-to-quality trend by tenants, this suggests a positive backdrop. The purchase price implies a valuation of $3,268 psf on NLA, 4.7% higher than the valuation of its existing stake at $3,123 psf,” he adds.
The acquisition by Keppel REIT will be funded largely by a $886.3 million preferential offering at an issue price of 96 cents. According to Krishna, the pro-forma DPU dilution, assuming tax transparency and adjusting for fees paid in units and the anniversary distribution, is 6.4%. The NAV dilution is 4.7%.
“Notwithstanding the initial dilution, potential upside exists from the refinancing of existing debt and positive rent reversion, though the timelines remain fluid. Gearing remains relatively unchanged at 41.9%. Despite acquiring a majority two-thirds stake, the asset will continue to be equity accounted for,” mentions Krishna.
Hence, the analyst cuts Keppel REIT’s FY2026 and FY2027 DPU by 12.8% and 13.9%, respectively, factoring in the acquisition and fund-raising. This results in a lower dividend discount model-based target price of $1.00, compared against the previous target price of $1.15.
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Meanwhile, Morningstar Equity Research analyst Xavier Lee, in his Dec 11 note, highlighted that while the deal is expected to initially dilute Keppel REIT’s DPU, it represents a rare strategic opportunity to deepen exposure to a prime Singapore office asset with potential to outperform amid limited supply.
“In addition, management expects the transaction to have a neutral impact on DPU if leases are renewed at prevailing higher market rates and debt is refinanced at current lower interest rates. The trust is working to secure tax transparency for the asset, which would unlock annual savings of $8 million to $10 million,” Lee adds.
With that, the analyst lowers his fair value estimates for Keppel REIT to $1.10 from $1.16 to reflect dilution from the equity financing. The analyst adds that while unit prices may soften after the trading halt, he views the preferential offering as an attractive entry point for long-term investors.
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“Our FY2026-FY2027 DPU estimates are lowered by 7.4%-7.9% after updating our model for this transaction and fine tuning certain assumptions. We think units remain undervalued, supported by a FY2026 distribution yield of 5.2%,” mentions Lee.
Lee concludes that although the deal is dilutive to unitholders, he notes this is a premium office asset poised to benefit from Singapore's tight office supply and resilient demand. Beyond stable income, the asset offers strong potential for capital appreciation.
As at 10.05am, Keppel REIT units changed hands at 96.5 cents, up 0.5 cents or 0.52%.
