“Overall, we are slightly negative on the deal due to significant dilutive equity fund raising and tight pricing, and believe funding should have been from divestments instead,” Natarajan writes in his note on Jan 2, adding that he recommends investors who are looking for Singapore office exposure to buy Suntec REIT (SGX:T82U
) (target price: $1.60) instead.
In a bourse filing on Dec 31, Keppel REIT says it has completed the acquisition of a one-third interest in MBFC Tower 3. It now holds a two-third stake in the tower. The remaining one-third stake is held by DBS Bank, the tower’s anchor tenant.
Natarajan says the $1.453 billion acquisition price Keppel REIT paid to seller Hongkong Land comes a “hefty 4.7% premium” to its carrying value in December 2024. He adds that MBFC Tower 3’s net property income yield of c.3.5% at acquisition price is on the lower side.
In his note, Natarajan notes that there could be some upside potential in terms of rental reversion since MBFC Tower 3’s currently monthly average passing rent of $12 per sq ft is 10% below the average signing rents.
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After stripping out the effects of anniversary distributions (at $20 million per annum) and assuming full tax transparency and funding costs of 3.3% per annum, Natarajan says Keppel REIT will have a pro-forma (FY24) DPU dilution of -6.4%.
“Assuming a potential refinancing of incremental debt at c.2.2% pa, this will result in DPU dilution of -3.6%,” Natarajan writes. Keppel REIT will be taking over the existing debt for MBFC Tower 3, which is not due for refinancing in the next few years.
On Dec 26, Keppel REIT launched an $886.3 million preferential offering to help finance the acquisition. Keppel REIT says it will fund the acquisition with an equity bridge loan (EBL) first and the net proceeds raised from the offering will be used to repay the loan.
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Keppel REIT is issuing over 923 million new units as part of the offering. Entitled unitholders will be offered 23 new units at an issue price of 96 cents each for every 100 existing units. The preferential offering will close on Jan 9, and the new units will commence trading on Jan 19.
“As the new shares are issued at c.23% below book value, the transaction will dilute NAV by -5%. Gearing (post-acquisition) is expected to be at 41.9%, which is slightly on the higher side,” Natarajan says of the preferential offering.
Natarajan says he is lowering his forecasted DPU for FY26 and FY27 by 8% and 9% respectively after taking into account the acquisition, preferential offering, perpetual securities issuance and debt funding costs.
In a report dated Dec 10, JP Morgan’s analysts, Terence Khi and Mervin Song write: “Client concerns are centred on the dilutive transaction, although we see longer term benefits of the rare premium Grade A Singapore acquisition, with DPU recovery in 2027.”
Song and Khi maintain their overweight recommendation but with a lower December 2026 price target of $1.10 compared to $1.18 before the announcement.
Keppel REIT manager defends acquisition
In a dialogue session with the Securities Investors Association (Singapore) on Dec 30, the CEO of Keppel REIT’s manager Chua Hsien Yang acknowledged that while the “deal will not be immediately DPU accretive,” MBFC Tower 3 remains a “strategic acquisition” for them.
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“As at 3Q2025, the signing rent is already higher than the passing rent level required for the acquisition to be DPU neutral (assuming an asset level interest rate of 2.2% per annum) but below the average Marina Bay rent. Over time, as and when the leases come up for renewal, we will be able to renew them at a higher rate,” Chua says.
In fact, Chua says he would have wanted to raise Keppel REIT’s Singapore office exposure such as by exercising the pre-emptive offers for MBFC Tower 1, Tower 2 and One Raffles Quay. Hongkong Land is planning to transfer those assets into its new Singapore Central Private Real Estate Fund after the right of first refusal expired.
“We could not have acquired any more than MBFC Tower 3,” Chua says. “With just this acquisition, it will bring our pro forma aggregate leverage up to 49.9% with the EBL, which is just below MAS’ limit of 50%. As much as we would have liked, as these are good assets, we could not acquire more.”
