What’s Happening To OUE Commercial REIT Now?

OUE Commercial REIT (OUE C-REIT) invests in commercial properties, which are primarily used for offices or retail purposes. It has three properties in Singapore and one property in Shanghai, China. Presently, as of 19 September 2019, it has a market capitalisation of S$ 2.93 billion. Here, I’ll cover on the results for every properties owned by OUE C-REIT, latest financial results, valuation ratios and as well as its proposed merger with OUE Hospitality REIT (OUE H-REIT). 

Therefore, here are 10 things to know about OUE C-REIT before you invest: 

• Portfolio Composition 2018
  OUE C-REIT had increased its assets under management (AUM) from S$ 1.63 billion in 2014 to S$ 4.49 billion in 2018. Listed with two initial real estate, OUE Bayfront and Lippo Plaza, it has acquired 67.95% interest in One Raffles Place in 2015 which had raised its effective stake to 83.33% in that property and the office components of OUE Downtown in 2018.
  
  
  

Properties	Valuation (S$ Million)	Valuation (%)
OUE Bayfront	1,173.1	26.1%
One Raffles Place	1,813.5	40.3%
OUE Downtown	920.0	20.4%
Lippo Plaza, Shanghai	595.0	13.2%
OUE C-REIT’s Total	4,501.6	100.0%

• Financial Results:
  Since its inclusion of One Raffles Place, OUE C-REIT had recorded stable revenues of S$ 176-178 million per year, net property income of S$ 138 million per year and distributable income of S$ 70 million per year over the last three years.
  
  
  

Source: OUE C-REIT’s Annual Report

• Quarterly Results
  For the past 12 months, OUE C-REIT made S$ 196.5 million in revenues, S$ 153.3 million in net property income, and as much as S$ 85.9 million in distributable income. Therefore, OUE C-REIT has paid out as much as 2.98 cents in distribution per unit (DPU). 

Period	GroupRevenues(S$ Million)	Net Property Income(S$ Million)	Distributable Income(S$ Million)	Distribution per Unit (Cents)
Q3 2018	41,205	32,341	15,875	0.55
Q4 2018	48,036	36,635	21,500	0.75
Q1 2019	55,335	43,568	26,037	0.90
Q2 2019	51,885	40,750	22,535	0.78
Total	196,461	153,294	85,947	2.98

Source: OUE C-REIT’s Quarterly Reports

• Balance Sheet Strength
  As of 30 June 2019, OUE C-REIT has total debt of S$ 1.68 billion and has a total of S$ 4.57 billion in total assets. Thus, OUE C-REIT’s gearing ratio is 39.3%. Its weighted average debt cost is 3.5% per year, where 76% of its debt is based on fixed interest rates.
  
  
  
• Lease Profile
  As of 30 June 2019, OUE C-REIT’s weighted average lease expiry (WALE) is 2.5 years where its top 10 tenants contribute around 28% of its gross rental income (GRI). They are as follows:
  
  
  

No.	Tenants	GRI Contribution (%)
1	Bank of America Merrill Lynch	6.0%
2	Deloitte & Touche LLP	5.7%
3	L Brands	3.8%
4	Allen & Overy LLP	2.5%
5	OUE Limited	2.3%
6	Virgin Active Singapore Pte Ltd	1.7%
7	Hogan Lovells Lee & Lee	1.7%
8	Aviva Limited	1.5%
9	Professional Investment Advisory Services Pte Ltd	1.5%
10	Raffles Business Suites Pte Ltd	1.3%
OUE C-REIT’s Total GRI Contribution	28.0%

Source: OUE C-REIT’s Investors’ Presentation Q2 2019

• Proposed Merger with OUE H-REIT
  OUE H-REIT is a SGX-listed hospitality REIT that consists of the following properties:
  
  – Mandarin Orchard Singapore worth S$ 1.23 billion
  – Mandarin Gallery worth S$ 494 million
  – Crowne Plaza Changi Airport worth S$ 497 million
  
  
  Announced on 8 April 2019, OUE C-REIT intends to acquire 100% stakes in OUE H-REIT by issuance to OUE H-REIT’s unitholders for every unit of OUE H-REIT:
  
  – 4.075 cents in cash.
  – 1.3583 units of new OUE C-REIT.
  
  
  The enlarged portfolio of OUE C-REIT would have seven properties that would be valued at S$ 6.9 billion, placing it to be among the ten largest REITs to be listed on the SGX.
  
  
  

Source: Circular Dated 10 July 2019


According to OUE C-REIT, the proposed merger is expected to bring in a handful of benefits to unitholders of OUE C-REIT. They include:

1. Increase Income Resilience
The structure of master lease agreements for hotels are long-term (10 – 15 years) in nature.


2. Reduce Concentration Risk
It reduces the exposure associated to any single real estate class for the enlarged REIT has retail, office, and hospitality assets.


3. Enhanced Acquisition and Asset Enhancement Initiatives (AEI).
The enlarged REIT has the ability to raise another S$ 1.03 billion, which is made up of S$ 612 million in equity and S$ 414 million in debt where it can use it to undertake larger property transactions and AEI works to enhance the value of its existing properties. 


The proposed merger was approved by OUE C-REIT’s unitholders on 14 August 2019. Soon after, on 4 September 2019, the merging of the two REITs had became effective. Thus, OUE H-REIT is now a sub-trust of the enlarged OUE C-REIT.

• Oakwood Premier OUE Singapore (Oakwood)
  On 18 September 2019, OUE C-REIT has announced that it will invest in Oakwood, a 268-room serviced residences which occupy the 7-23 floor of OUE Downtown for a purchase consideration of S$ 289.0 million.
  
  
  
• Valuation 1: P/B Ratio
  After the Proposed Merger, OUE C-REIT has net asset value of S$ 0.62 a unit. As of 19 September 2019, it is trading at S$ 0.54 a unit. Thus, OUE C-REIT’s current P/B Ratio is 0.87. No comparison is given for the REIT is an enlarged entity of both OUE C-REIT and OUE H-REIT.
  
  
  

Source: Circular Dated 10 July 2019

• Valuation 2: Distribution Yield
  Based on the illustrative DPU given of 3.48 cents, the distribution yields of the enlarged OUE C-REIT is 6.44% per annum.
  
  
  

Source: Circular Dated 10 July 2019

VIA’s Verdict 

OUE C-REIT had just completed its merger with OUE H-REIT, thus, ushering into a new era where it is now among the ten biggest REITs in Singapore. The bigger entity has a more resilient sources of income and a bigger capital base which is helpful to undertake real estate investments which are bigger in the future. 

So, will you invest in the enlarged OUE C-REIT at S$ 0.54 a unit today? 

That, I’ll leave you to decide. 

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