Questions For KepLand To Address

Source : The Business Times, 11 Sept 2007

MORE than a month after Keppel Land’s sale of its one-third stake in One Raffles Quay (ORQ) to its listed trust K-Reit Asia, questions are still being raised about the site’s pricing. KepLand sold its share in ORQ for $941.5 million, which works out to some $2,109 per square foot (psf).

While KepLand has described the price as fair and pointed out that the sale comes with significant long-term strategic benefits for it, some analysts and shareholders are still wondering if KepLand could have got a better deal if it had sold to a third party.

When the deal was first announced, analysts pointed out that the price appeared to be on the low-end of the range, considering ORQ’s prime Grade A status. Nearby, 1 Finlayson Green was sold to a UK property fund at a considerably higher $2,650 psf in June.

The company’s share price has slipped some 8.3 per cent to $7.70 from $8.40 when the deal was announced on July 30. While part of the fall can be attributed to a broad market pull-back, the overall property index has fallen by a smaller 3.5 per cent

At the heart of the matter is a series of discounts offered by KepLand to K-Reit. KepLand says that the effective price for its one-third ORQ stake comes to between $2,882-$3,052 psf. But the actual price paid by K-Reit was much lower. For starters, the trust received a 10-15 per cent discount as it was only being sold a minority stake in the project.

In addition, a discount of $150 psf was given as K-Reit faces potential tax exposure from its ORQ stake. The stake sold to K-Reit was in ORQ’s North Tower, which is classified as ‘trading property’ - unlike the South Tower. Profit on the sale of trading properties is subject to tax.

Both reasons for the discounts have come under market scrutiny. For one, some shareholders and analysts have questioned the rationale for the 10-15 per cent discount. Said one analyst BT spoke to: ‘Why 10-15 per cent? Why not 5 per cent?’

KepLand, on its part, said that a 10-15 per cent discount is ‘within market range for a sizeable transaction with minority rights and limited financing options’ - but there is no full agreement in the market on that. Similarly, there are questions as to why the North Tower was classified as a trading property.

KepLand needs to explain its rationale to shareholders and analysts quickly. The developer has already met with some institutional investors to explain the pricing, BT understands.

But more of an effort has to be made, especially when it comes to retail investors, who have been left somewhat in the dark. This is especially urgent as KepLand will soon have to hold an extraordinary general meeting to obtain shareholders’ approval for the sale.

Keppel Land owns about 40 per cent of K-Reit. And most analysts BT spoke to agree on one thing - that the sale is positive for KepLand from a strategic long-term view as there is a recurrent stream of fee income which would not be the case if the stake had been sold to a third party.

An analysis by Goldman Sachs, for example, shows that the net benefit to a developer is roughly the same from selling to a sponsored Reit or from selling to a third party at a price that is nearly 20 per cent more. But more investors need to be convinced of that. And the rationale for the discounts has to be explained better.