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.

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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 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.

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.

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.

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