OUE Commercial REIT - CGS-CIMB Research 2018-09-11: Deepening CBD Office Footprint

OUE Commercial REIT - CGS-CIMB Research 2018-09-11: Deepening Cbd Office Footprint OUE COMMERCIAL REIT SGX:TS0U

OUE Commercial REIT - Deepening CBD Office Footprint

  • OUECT has proposed to acquire OUE Downtown office towers for S$908m.
  • Transaction NPI yield of 5%; deal to expand exposure to the key nodes within Singapore CBD.
  • Purchase to be funded by a S$587.5m equity fund raising and S$361.6m debt.
  • Maintain HOLD with a rights-adjusted Target Price of S$0.60.

To buy OUE Downtown office towers

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  • OUECT announced the proposed acquisition of the office component of OUE Downtown for S$908m (S$1,713psf) or at a 2-3.9% discount to independent valuations of S$927m- 945m.
  • The property comprises 2 office towers with a total lettable area of 529,981sf and has a committed occupancy of 95.1%. Key tenants include Deloitte & Touche, Aviva and Moody's Analytics. The building is located close to the Tanjong Pagar, Downtown and upcoming Shenton Way and Prince Edward MRT stations.
  • The transaction is subject to unitholders’ approval at an EGM, scheduled on 28 Sep 18.

Transaction NPI yield of 5%

  • Transaction NPI yield is at 5%, inclusive of an aggregate amount of S$60m of rental support or for a period of up to 5 years, whichever is earlier, and is higher than existing portfolio yield of 4%. 
  • The rental support is based on a target base gross rent of S$8.90- 9.40psf between 2018 and 2023. Excluding the top-up, we estimate net yield would have been closer to the mid-3% level, based on the average passing rent of S$7psf/month. This is below the current Shenton Way/Tanjong Pagar spot rent of S$8.43psf, based on Colliers research. 
  • This will enable the property to enjoy positive rental uplift when leases are renewed. About 73.6% of the NLA is due to expire during 2H18-2020.

Acquisition to be funded with an equity and debt exercise

  • Total transaction cost of S$955.9m will be funded via a rights issue of S$587.5m, debt of S$361.6m and acquisition fees in units of S$6.8m. The fully underwritten and renounceable rights issue will be at a basis of 83 rights for every 100 existing OUECT units at a price of S$0.456/rights unit. The rights price is at a 31.4% discount to OUECT's 10 Sep closing price and a 20% discount to the theoretical ex-rights price of S$0.57.
  • The Sponsor has undertaken to fully subscribe for its pro-rata entitlements of the rights issue and sub-underwrite 66% of the rights units to be underwritten by the lead managers and underwriters.
  • Post transaction, OUECT's aggregate leverage is expected to improve to 39.8% from 40.3% at end-Jun 18.

Increasing exposure to key CBD nodes

  • We think the acquisition of OUE Downtown is timely, given the recovery in the office leasing market with a diversified tenant mix as well as benefit from the transformation of Tanjong Pagar. The purchase will expand OUECT's portfolio NLA to 1.6msf valued at S$4.4bn, of which 83% is located in key nodes within the Singapore CBD.
  • Balance sheet is also strengthened with a higher potential debt headroom of S$399m, based on the 45% ceiling.

Maintain HOLD

  • We lower our FY18-20F DPU estimates by 5.2-20.7% to factor in the additional contributions from OUE Downtown office, assuming deal completion by Nov 18, as well as dilution from the rights issue. Accordingly, our DDM-based Target Price is lowered to S$0.60.
  • We expect OUECT’s share price to be range bound in the near term as investors digest the equity exercise.
  • Upside risks to our call include a faster-than-expected office rental market recovery and a more optimal capital structure.
  • Downside risks include macro headwinds that could slowdown office demand.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-09-11
SGX Stock Analyst Report HOLD Maintain HOLD 0.60 Down 0.750