SK REITs Completes Jongno Tower Acquisition... Achieves Asset Scale of 3.1 Trillion Won

Ownership Transfer via REITs by KB Asset Management
4% Range Acquisition Financing Borrowed Amid High Interest Rate Environment

[Asia Economy Reporter Jang Hyowon] Total Value No.1 REIT, a 100% subsidiary REIT of SK REITs, announced on the 20th that it has completed the ownership transfer of Jongno Tower, located at Jongno 51, Jongno-gu, from KB Asset Management. With this, SK REITs' asset size reached 3.1 trillion KRW, solidifying its top position with a gap of over 600 billion KRW compared to other REITs in terms of asset scale.

The purchase price of Jongno Tower was 621.5 billion KRW (33.9 million KRW per pyeong), with total investment costs including incidental expenses amounting to 676.8 billion KRW. Total Value No.1 REIT raised 421.4 billion KRW through a paid-in capital increase from SK REITs and financed the remaining 244.8 billion KRW through bank secured loans to acquire the asset.

Looking at the composition of the paid-in capital funds received from SK REITs, it consists of 96 billion KRW in unsecured corporate bonds (AA-/Stable), 29 billion KRW in convertible bonds, and 334 billion KRW in bridge-type electronic short-term bonds.

While senior interest rates have soared to the 5-6% range, severely impacting the commercial real estate market, SK REITs demonstrated its financing capability by successfully borrowing 370 billion KRW at an interest rate in the 4% range. This maximized defense against high-interest rate issues by leveraging SK REITs’ advantage of holding an AA-/Stable credit rating.

In addition to the collateral loan of the subsidiary REIT, SK REITs combined unsecured corporate bonds at just over 5% and convertible bonds at a 2% interest rate to borrow funds, aiming to minimize market volatility issues and keep interest rates as low as possible.

Notably, the issuance of convertible bonds at an interest rate in the 2% range is a first attempt in the REIT industry. This strategy aims to minimize the impact on shareholder dividends based on a low interest rate in a high-interest rate era. The issuance volume is 29 billion KRW, approximately 2% of the existing shareholders’ equity ratio. SK REITs plans to purchase high-yield assets through additional borrowing by utilizing the lowered LTV if the convertible bonds are converted into shares.

Jongno Tower is a representative landmark asset in the central Seoul area connected to Jonggak Station, with a 5-year average official land price increase rate of 9.6%. Due to a shortage of office supply in the Jongno area, recent bids for A-grade offices have reached 37 million KRW per pyeong, pushing market prices even higher. Industry experts predominantly believe that the prime office transaction at around 33.9 million KRW per pyeong will be the last for Jongno Tower.

Jongno Tower had long been an undervalued asset in the market due to vacancy issues despite its locational value and recognition. SK REITs Management secured a right of first refusal from KB Asset Management by attracting the Green Campus, where six SK Group eco-friendly business units are gathered, to Jongno Tower.

The current rent is more than 20% lower than the surrounding market price, leaving room for profitability improvement. With approximately 1,200 SK employees relocating, retail and the surrounding commercial district are expected to regain vitality. SK REITs plans to sequentially implement rent normalization, application of eco-friendly energy solutions, installation of media facades, and retail improvements to enhance the building’s value.

An SK REITs Management official said, “The borrowing interest rate in the 4% range is the result of intense deliberation by all parties to minimize the impact on shareholder dividends amid unstable capital markets,” adding, “SK REITs will gradually execute value-up plans to ensure Jongno Tower fulfills its role as a core asset in South Korea’s commercial real estate.”