Keppel-KBS seeks to ape Manulife Reit success

A second US-focused real estate investment trust launches a Singapore IPO in the hope of riding the momentum generated by its closest peer.

Keppel-KBS US Reit launched a $448 million initial public offering on Wednesday, hoping to replicate the success of its predecessor, Manulife US Reit, which has consistently outperformed expectations since it listed in May 2016.

If its 509.137 million unit flotation is successful, Keppel-KBS US Reit will become the second US-focused reit to list in Singapore. It will also boost issuance activity from the sector, which is running below 2016 levels because there has only been one IPO so far this year from Dasin Reit, which raised $108 million in January.

According to Dealogic figures, there has been $1.9 billion in issuance from the Singapore reit sector so far this year compared to $2.62 billion in 2016. However, secondary market activity has been extremely strong, standing at $1.8 billion compared to $1.19 billion for the whole of 2016.

This equity capital raising has been driven by the sector's strong share price performance. Manulife has done particularly well, rising 20% year-to-date and beating the Straits Times Index, which is up 16.08% over the same period.

Analysts attribute its solid performance to results, which continue to outperform expectations and a series of dividend accretive acquisitions. 

Indicative terms for Keppel-KBS suggest it has the same winning formula, although some of its metrics are not as strong as Manulife.

What both companies offer is a high yield at a time of prolonged and low in US interest rates. Reits tend to trade down as rate expectations rise, but Manulife's outperformance has continued all year even when 10-year Treasuries jumped from their low of 1.35% in August to 2.44% during US trading on Wednesday.

With a fixed dividend yield of 6.8% in 2018, Keppel-KBS is offering a 436bp pick-up to US Treasuries. The syndicate are pitching an even higher 2019 forecast dividend yield of 7.2% in 2019.

Together, Keppel-KBS’s combined dividend is higher than Manulife's 6.6% and 3.4% yields for 2018 and 2019 respectively. 

Both companies have similar portfolio values and leverage ratios, although Manulife has a lower average cost of debt (2.46%) compared to Keppel-KBS's 3.38% and has fixed 100% of its debt compared to 75% for Keppel-KBS. At IPO, Keppel-KBS will have a leverage ratio of 36%.

However, structurally both companies are very similar. They are backed by experienced sponsors with large assets under management ($30 billion for Keppel-KBS), report in US dollars, offer distributions in either US dollars of Singapore dollars and embrace the same cost-effective tax structure. 

Their US dollar element also offers a counterbalance to rising rates since it is likely to boost returns on a currency-adjusted basis. 

According to its net roadshow, Keppel-KBS's 11 office properties have a net lettable area of 3.2 million square feet and a portfolio value of $829.4 million. There is a geographical split of 38% West Coast (concentrated in Seattle), 14% East Coast and 48% central states.

Occupancy rates at 90% are high, but not quite as high as the 95.9% level Manulife reported during its second quarter results. Likewise, Keppel-KBS’s weighted average lease expiry (WALE) of 3.7 years is not quite as good as the 5.3 years that Manulife recently reported. 

Both companies benefit from a strong US office market where demand is high and supply low, although in a recent research report, Deutsche Bank cautioned that it is hitting mid- to end-cycle. Keppel-KBS says 97.5% of its existing leases have 2% to 3% in-built rental escalations and 30.4% will expire in the next two years. 

The reit also has a more diversified tenant mix than Manulife with its top 10 tenants accounting for 22.3% of cash rental income compared to 60.4% for Manulife. 

Institutional bookbuilding for the IPO will continue until November 1, with allocations scheduled for November 2 ahead of a retail offering between November 2 and 7. Listing will take place on November 9.

The IPO price has been fixed at US$0.88 per unit, with $216.8 million or 48.4% of the deal allocated to cornerstone investors comprising Affin Hwang, Credit Suisse (private banking clients), DBS Bank and DBS Bank (private banking clients) and Hillsboro Capital. 

The institutional portion will account for a further 44.9% of the deal, with retail investors taking up the remaining 6.7%. Post greenshoe, there will be an 86% freefloat. 

Lead managers are Bank of America Merrill LynchCiti, Credit Suisse and DBS.

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