OUE C-REIT – Lim & Tan

OUE Commercial Real Estate Investment Trust (OUE C-REIT) is launching its IPO at an offer price of S$0.80 per unit. We highlight the key considerations below for investors.

Portfolio

• The initial portfolio of OUE C-REIT comprises two commercial properties, namely OUE Bayfront and Lippo Plaza that are located in Singapore and Shanghai with an aggregate GFA of about 105,296.1 sq m and a total appraised value of S$1,623.6 mln as at Sept 2013. The overall committed occupancy rates for the OUE Bayfront and Lippo Plaza were 96.1% and 88.2% respectively.

Sponsor

• OUE C-REIT is backed by OUE – a diversified real estate developer owned by Indonesia's Lippo Group. The Sponsor will hold a 45.2% stake in OUE C-REIT post-listing (assuming the Over-allotment Option is exercised in full). The sponsor has also granted a right of first refusal (ROFR) over its income-producing properties including i) One Raffles Place; ii) OUE Downtown 2 and Downtown Gallery and iii) U.S. Bank Tower. This will provide OUE C-REIT with access to a visible acquisition pipeline and increase its IPO portfolio GFA to over 4.5 times when acquired.

Yield & Valuation

• We note that the Sponsor will provide income support to OUE C-REIT for a period of 5-year from the listing date. Based on the offering price of S$0.80, this translates to:

  FY14 projected yield: 6.80%

  FY15 projected yield: 6.89%

  Discount to NAV: 23.9%

• Aggregate gearing / Avg cost of debt H" 42.3% / 2.5% per annum

Use Of Proceeds

• The total gross proceeds of about S$346.4 mln will be mainly used for the acquisition of the IPO Portfolio, repayment of the Existing Offshore Facilities, refinancing the Existing Onshore Facility, transaction costs as well as working capital purposes.

Our View

• Despite the high headline yield, we note that FY14 and FY15 distribution yield would have been lower at 5.56% and 5.75% respectively if excluding the effects of the income support arrangement. Moreover, with interest rates set to rise, we could see higher borrowing cost when most of its debts mature in 2017. In our view, this could partially offset any potential growth in DPU.
• We are also concerned with its relatively high gearing ratio of 42.3% as OUE C-REIT may have to resort to equity fund raising either in the form of a rights issue or private placements for any future acquisitions.

Key Risks

• Downside includes concentration risk i.e heavily reliant on OUE Bayfront for about 67% of its gross revenue; non-renewal of leases/loss of key tenants/negative rental reversion as well as borrowing limitation.

Cornerstone Investors

• Summit SPV, Mr Gordan Tang, Mdm Chen Huaidan, Mr Yang Dehe and RHB Asset Management

IPO Statistics

Offering Size: 208mln Units (subject to Over-Allotment Option), comprising a Placement Tranche of 151.75 mln Units and a Public Offer of 56.25 mln Units

Offer Price: S$0.80 per Unit

Offering Opens: 17 Jan 2014, 5pm

Offering Closes: 23 Jan 2014, 12pm

SGX-ST trading

Commencement: 27 Jan 2014, 2pm