OUE C-Reit to buy Shenton Way offices from sponsor for S$908m

Singapore

OUE Commercial Real Estate Investment Trust (C-Reit) has agreed to buy the office components of the OUE Downtown development from sponsor OUE for S$908 million.

To help pay for the acquisition, OUE C-Reit is proposing to raise S$587.5 million through an underwritten and renounceable rights issue on the basis of 83 new units for every 100 units held at S$0.456 per rights unit.

This represents a theoretical ex-rights price of 57 Singapore cents.

OUE C-Reit units closed S$0.005 or 0.8 per cent lower at S$0.66 on Tuesday following the early morning announcement.

Based on the Reit's closing unit price, the rights price represents a 30.9 per cent discount.

DBS Equity Research analysts noted that in terms of valuation, "the purchase consideration is reasonable considering the tight yields for Singapore office buildings currently, the 'short' land tenure for the building as well as the potential upside in rents and occupancy".

As for the rights issue, the analysts believe "some investors will react negatively to the near-term dilution in distribution per unit and the rental support required for the transaction".

"However, in the medium term, we believe this transaction provides the Reit with a stronger organic growth profile given its increased exposure to the upturn in the Singapore office market."

DBS is maintaining its "hold" call on the Reit, with a target price of S$0.67.

Credit Suisse and OCBC Bank are the lead managers and underwriters of the rights issue.

OUE, a property developer that holds a 55.9 per cent stake in the Reit, has agreed to fully subscribe for its entitlement in the rights issue.

It has also agreed to a sub-underwriting agreement to buy up to 66 per cent of the rights units offered to other unitholders if they are not taken up.

OUE Downtown is a mixed-use development comprising two high-rise towers, located along Shenton Way in Singapore's Central Business District. OUE C-Reit's purchase of the development excludes the multi-storey car park, serviced residence component and retail podium.

The office components were 95.1 per cent occupied as at June 30, 2018 and have a weighted average lease expiry of two years based on gross rental income and net lettable area.

The purchase price works out to about S$1,713 per square foot. This represents a 2 per cent and 3.9 per cent discount to a valuation by Savills and Colliers, respectively.

OUE C-Reit expects acquisition-related fees and expenses to bring the total cost of the transaction to about S$955.9 million. Some S$361.6 million of the payment will be financed through debt and borrowings.

OUE said that the proposed sale will unlock capital for higher-growth reinvestment opportunities and allow the company to pursue its strategy through a capital-efficient platform and to derive a stable income stream.

OUE shares closed S$0.01 or 0.6 per cent higher at S$1.59 on Tuesday.