·        Financed through new debt issuance and private placement at a 15% premium to share price.  The acquisition will be financed through additional bank borrowings of S$158.2m and a private placement to raise gross proceeds of S$70.2m through the issue of 60m new K-REIT units to the vendor at an issue price of S$1.17 per unit.  K-REIT has managed to raise 60m in additional equity at S$1.17, a rare 15% premium to its last traded share price of S$1.02.

·        DPU accretive with income support.  The acquisition will be DPU accretive, boosting 2012F-2014F DPU by 1.3%-2.7%.  The vendor will also provide income support of S$24.1m, supporting an acquisition NPI yield of 4.7% until end-2017.

·        Acquisition price not fully factoring in the weakness in office rentals. Acquisition price is equivalent to K-REIT’s initial acquisition cost of S$2,013m or S$2,380 psf excluding income support for its 87.5% stake in OFC in 4Q11. The Grade-A office rentals in Singapore have seen a 3.6% qoq correction to S$10.60 psf pm since then. While the office capital values have held up despite the correction in rentals, further weakness in rentals could adversely impact asset values.  

·        Threat of additional equity fund raising with gearing of 43.9%. Gearing post acquisition and the placement would rise 2.1ppt to 43.9% from 41.8% in 1Q12.  Though this is still well within the 60% gearing limit, the threat of additional equity fund raising is raised as K-REIT nears the 45% gearing limit that could result in a credit rating downgrade.  Our sensitivity analysis indicates that every 10% fall in asset values would imply 4.8 ppt rise in gearing.