Saturday, January 11, 2014

OUE COMMERCIAL REAL ESTATE INVESTMENT TRUST

Short Summary:
OUE C-REIT is a Singapore real estate investment trust (“REIT”) established with the principal investment strategy of investing, directly or indirectly, in a portfolio of income-producing real estate used primarily for commercial purposes (including real estate used primarily for office and/or retail purposes) in financial and business hubs within and outside of Singapore, as well as real estate-related assets. The initial portfolio will consist of 2 properties: The OUE Bayfront Property located at Collyer Quay in Singapore’s central business district and The Lippo Plaza Property, located at 222 Huaihai Zhong Road in the commercial district of Huangpu in central Shanghai, the PRC.

The OUE Bayfront Property will consists of
  1. OUE Bayfront, an 18-storey premium office building with rooftop restaurant premises;
  2. OUE Tower, a conserved tower building located at 60 Collyer Quay with panoramic views of the Marina Bay landscape which is currently occupied by a fine dining restaurant; and
  3. OUE Link, a link bridge located at 62 Collyer Quay with retail units.
The Lippo Plaza Property on the other hand is a 36-storey Grade-A1 commercial building used for office and retail purposes comprising of three basement levels  of commercial space and car park lots, excluding Unit 2 on Basement 1, the 12th, 13th, 15th and 16th Floors and four car park lots.

The Deal:
Offering Price: S$0.80
The Offering: 208,000,000 Shares (Include 56,250,000 Offering Shares to Singapore Public)
Cornerstone Investors:
433,000,000 (50%) Clifford Development Pte. Ltd., a wholly-owned subsidiary of the Sponsor
125,000,000 (14.4%) Summit SPV
31,250,000 (3.6%) Mr Gordon Tang
31,250,000 (3.6%) Mdm Chen Huaidan
25,000,000 (2.9%) Mr Yang Dehe
12.500.000 (1.4%) RHB Asset Management Sdn Bhd
 

Forecast Dividend Yield:
2014: 6.80%
2015: 6.89%
*Based on issue price of $0.80, 866,000,000 units after IPO.
 

Dividend Policy:
OUE C-REIT’s distribution policy is to distribute 100.0% of OUE C-REIT’s Distributable Income for the Forecast Year 2014 and the Projection Year 2015. Thereafter, OUE C-REIT will distribute at least 90.0% of its Specified Taxable Income for each financial year. The actual level of distribution will be determined at the discretion of the Board. The actual proportion of Distributable Income distributed to Unitholders beyond 31 December 2015 may be greater than 90.0% to the extent that the Manager believes it to be appropriate, having regard to OUE C-REIT’s funding requirements, other capital management considerations and the overall stability of distributions.
 
Strength
-IPO Portfolio comprises landmark commercial properties strategically located in the prime commercial districts of Singapore and Shanghai
-Unique opportunity for investment exposure to prime commercial real estate in the key international financial and business hubs of Singapore and Shanghai
-Stable and resilient portfolio (Track record of consistent growth, Strong historical occupancy, Diversified and high quality tenant base, Minimal capital expenditure expected after the Listing Date)
-Stable and attractive distribution yield with potential organic growth
-Strong, reputable and committed Sponsor with proven track record of delivering value
-Experienced and professional REIT management and property management teams
-Significant potential acquisition pipeline (a right of first refusal to 3 properties: OUE Downtown 2 and Downtown Gallery located in Shenton Way, Singapore, U.S. Bank Tower located in Los Angeles, U.S. and One Raffles Place located in Raffles Place, Singapore)
 
Business Strategies and Future Plans
  • Active asset management strategy – The Manager will actively manage OUE C-REIT’s property portfolio and strive to achieve growth in revenue and Net Property Income and maintain high occupancy levels. The Manager will also look to drive organic growth and build long-lasting relationships with the tenants of OUE C-REIT’s properties. Its focus will be on regular engagement with tenants, effective marketing of vacant units and achieving early renewal commitments.
  • Active asset enhancement strategy – The Manager will seek property enhancement opportunities to support and enhance organic growth.
  • Acquisition growth strategy by leveraging on the Sponsor’s experience and supported by the Sponsor ROFR – The Manager will achieve portfolio growth through the acquisition of quality income-producing commercial properties that provide attractive cash flows and yields and which fit within OUE C-REIT’s investment strategy to enhance returns to Unitholders and improve future income and capital growth.
  • Capital and risk management strategy – The Manager will endeavour to employ an appropriate mix of debt and equity in financing acquisitions and asset enhancements, and utilise hedging strategies where appropriate to manage interest rate volatility and foreign exchange exposure for OUE C-REIT while maintaining a strong and robust balance sheet.
Weakness
-OUE C-REIT may be adversely affected by economic and real estate market conditions, as well as changes in regulatory, fiscal and other governmental policies in Singapore and the PRC.
-OUE C-REIT is reliant on the OUE Bayfront Property for a substantial portion of its Gross Revenue.
-A substantial number of the Properties’ leases are for terms of one to three years, which exposes the Properties to significant rates of lease expiries each year.
-There is no assurance that the level of Distributable Income attributable to the OUE Bayfront Property can be sustained at the forecast and projected levels once the Income Support entered into with the Sponsor expires or is withdrawn.
-There is no assurance that the Properties will be able to maintain rental rates at prevailing market rates.
-OUE C-REIT is subject to the risk of non-renewal, non-replacement or early termination of leases.
-The loss of key tenants or a significant number of tenants of any of the Properties or a downturn in the businesses of key tenants or a significant number of tenants could have an adverse effect on the business, financial condition and results of operations of OUE C-REIT. (The top 10 tenants of the Properties by Gross Rental Income accounted for approximately 50.2% of the Gross Rental Income of the Properties for the month of September 2013)
-OUE Tower has been gazetted for conservation, which may reduce OUE C-REIT’s ability to optimise use of the OUE Bayfront Property.
-There is no assurance that an extension or new leasehold title to OUE Link will be granted.
-The underlying land use right of the Lippo Plaza Property will expire in 2044 and in the event that an extension to the land use right is sought and obtained (and there can be no assurance that such extension will be obtained as there are currently no precedents of such extension), there is uncertainty about the quantum of land grant premium which OUE C-REIT will have to pay and additional conditions which may be imposed.
-The Properties and properties to be acquired by OUE C-REIT may require periodic capital expenditure and OUE C-REIT may not be able to secure financing to fund the necessary works.
-OUE C-REIT’s assets might be adversely affected if the Manager, the Property Manager, the local property manager which manages the Lippo Plaza Property and/or any property manager appointed to manage any other property owned by OUE C-REIT does not provide adequate management and maintenance.
-Renovation or redevelopment works or physical damage to any of the Properties may disrupt the operations of the affected Property and collection of rental income or otherwise result in adverse impact on the financial condition of OUE C-REIT.
-High gearing of 49.80%

Another OUE property spin off at a time when low borrowing interest rates and easy money is coming to an end. This is a time where developers with assets will try to cash in so that they can better relocate their capital into areas with higher returns. I would think Singapore appetite for REITs are saturated, as evident that their cornerstone investors are mostly overseas, leaving only 48% (100m shares) of the offering to Singapore public, which is very little in my opinion. The forecast dividend yield of 6.8% is not attractive to me either. High gearing of 49.8% after IPO doesn't help at all, as it means that the REIT will be impacted should interest rates rise and they will not be able to acquire additional properties without issuing new units, leading to dilution of shares for existing shareholders. I certainly will not be participating in this IPO.

Some useful information:
[17 Jan 2014], [5,00 p.m.] : Opening date and time for the Public Offer.
[23 Jan 2014], [12,00 noon] : Closing date and time for the Public Offer.
[24 Jan 2014]: Balloting of applications under the Public Offer, if necessary.
[27 Jan 2014], [2,00 p.m.]: Commence trading on a “ready” basis.
 
Rating for investment: 5.0/10

Disclaimer: You may use the above information as a guide, but please invest based on your own judgment.

2 comments:

Sanjay Sawant said...

the developers of the reality properties are very happy with the creation of such REITs. it has been beneficial for them s they got pool investments in their projects.

Kang Rui Ng said...

REITs in general are good for the developers as they can cash in their investment as they spin off their assets holdings and redirect the money into more project developments. However, as individual investors, we have to cheery pick which REITs has the potential to grow and which doesn't, so that we can grow our money which we invested in.