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(SINGAPORE) The sale of Keppel Land's entire 87.5 per cent stake in Ocean Financial Centre to K-Reit Asia for $1.57 billion has raised eyebrows.
Several analysts who spoke to BT on condition of anonymity argued that the deal may have been disadvantageous to K-Reit unitholders.
For one thing, while the prime Grade A office building in Raffles Place has a tenure of 999 years, K-Reit will get the stake with only a 99-year lease for now, though it can exercise a call option to re-gain the property after 99 years.
Without the income support from Keppel Land of up to $170 million, the sale price of the office building translates to about $2,400 per square foot (psf), which K-Reit unitholders deem high at a time when the economic prognosis is grim.
In a third-quarter report, Colliers International noted that the office market has cooled further, with many companies taking a longer time to commit to new space amid caution over expansion plans.
The office market remains highly correlated to the country's economic performance and employment in business and financial services, CBRE said in a recent report.
'They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,' said one analyst.
A second analyst said: 'Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.'
Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. 'The price is at the top of the market. Granted that it's a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?' he said. 'The deal is skewed towards the parent.'
He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. 'It's a good idea if it is being used to purchase depressed assets,' he said.
Still other analysts, while cautious, were more optimistic over the deal. 'It is too premature to pan the deal, especially when unit prices of office S-Reits have probably over-discounted the severity of the forthcoming downturn,' said a Daiwa report. The big concern is whether the income support is sustainable, it added.
Ocean Financial Centre has a committed occupancy rate of 80 per cent, with existing leases at about $9 psf. The income support, by Daiwa's estimates, should raise the overall current rent to $14 psf and be 'just enough' to last until 2016.
If in 2015 and 2016 - when nearly 30 per cent of the leases are up for renewal - spot rents hit $10.60 and $11.70 respectively, there would be 'significant decline' in Ocean Financial Centre's contribution in 2017, it said. 'However, if spot rents reach the mid-teens when the renewals take place, there might not be much drop-off, if any.'
In a client note, Credit Suisse said 'admittedly, market conditions are a little uncertain, and perhaps timing may not be perfect'.
But comparing with the Marina Bay Financial Centre transaction that involved K-Reit and Suntec last year, the acquisition price is fair from a long-term view, it added.
The approval from unitholders also came via a show of hands at the extraordinary general meeting - a practice that the Code of Corporate Governance no longer accepts as sound governance - and amid criticisms from minority unitholders over the price and timing.
'Given the size of the deal and the fact it was a related-party transaction, the vote should have been carried out by poll, with the results tabulated to include the percentages of voting for and against the acquisition,' said Lee Kha Loon, head of the Standards and Financial Market Integrity division of CFA Institute for the Asia-Pacific region, in a blog post for the institute.
A K-Reit spokeswoman said minority unitholders can call for a voting by poll so long as this request is supported by unitholders representing at least 10 per cent of the units held by those present. But the poll request, led by one institutional unitholder and supported by a few retail unitholders, fell short of this number.
All interested parties that included Keppel Land were not allowed to vote. BT also understands that a proxy voter holding a significant block of 46 million units had already been instructed to vote in favour of the deal. Keppel Land said the sale would 'unlock part of its investment holding especially given the strategic commercial reasons and the volatile economic climate'.
As for K-Reit, the acquired Ocean Financial Centre will also provide strong branding, making it a key office landlord in the Marina Bay and Raffles Place areas, with the transaction boosting the size of its assets under management from some $3.9 billion to about $5.9 billion.
The deal is also expected to be accretive to the Reit's distribution per unit from the cash flows generated, and should improve K-Reit's lease expiry profile such that no more than 11 per cent of its portfolio by net lettable area will expire in any one year over the next five years.
BT | 
