OUE Commercial Real Estate Investment Trust (“OUE C-REIT”) is one of the largest diversified REITs in Singapore with a total asset of SGD 5.8b as at the end of last year. It primarily invests in commercial and hospitality properties in Singapore and China. As of 31 December 2021, OUE C-REIT’s portfolio comprises of 7 properties including offices, hotels and retail malls.
OUE C-REIT is managed by OUE Commercial REIT Management Pte. Ltd., which is a wholly-owned subsidiary of OUE Limited. Its portfolio is diversified across different assets and segments, with no single asset contributing to more than 23.7% of its total portfolio revenue based on its 1Q22 business updates. Its tenant base is also well spread across various sectors, including Hospitality (26.8%), Banking Insurance & Financial Services (16.8%) and Accounting & Consultancy Services (11.5%), with a weighted-average lease term to expiry (“WALE”) of 3.4 years by Gross Rental Income.
Proceeds from the re-tap issue will be used to refinance the Group’s existing borrowings, general corporate funding (including investments and capital expenditures) and/or other general working capital purposes. The reopening price will be at 4.20% plus accrued interest from (and including) 5 May 2022 to (excluding) 27 May 2022, and the total size of the re-tap will be capped at SGD 50m.
In the event if OUE C-REIT and the bond are assigned an investment grade (“IG”) rating within 18 months from the issue date from a rating agency (“Initial Rating Event”), the coupon rate will be stepped down by 0.25% per annum. Following the Initial Rating Event, if the rating agencies decide to withdraw or downgrade OUE C-REIT and/or the notes such that they are no longer IG, the coupon rate will be re-rated back to 4.2% until they are assigned an IG rating again. For more information regarding the coupon step-up and step-down triggers, investors can refer to the bond factsheet here.
For the first quarter ended 31 March 2022, its net property income declined by 21.5% year-on-year (“YoY”), primarily due to the deconsolidation of OUE Bayfront’s financial performance following the sale of 50% interest in the property. Total amount available for distribution fell by 15.8% YoY to SGD 31.2m on the back of drawdown of income support from OUE Downtown Office, offset by contributions from OUE Bayfront and lower interest expenses. Even though committed occupancy for its commercial segment was 0.3 percentage points (“ppt”) lower quarter-on-quarter at 91.2%, average passing rents for all of its Singapore office properties still remained stable for 1Q22.
Moving on to its credit profile, aggregate leverage for OUE C-REIT was 39.4% as of 31 March 2022, which was 1.0 ppt lower compared to a year ago. Weighted-average cost of debt decreased slightly to 3.0% per annum, and following the recent issuance of the 2027 notes, its pro-forma average term of debt is expected to increase slightly to 2.9 years with ~74.3% of its debt being fixed rate, therefore, reducing interest rate volatility. Its interest servicing ability remained healthy with an EBITDA/interest expense ratio of 3.0x as of 31 March 2022, marking a slight improvement from 2.6x from a year ago.
In terms of relative valuation, the current OUECT 4.200% 05May2027 Corp (SGD) is yielding around 4.17% as at 23 May 2022, and the re-tap provides investors the opportunity to purchase the 2027 notes at an annualized yield of 4.20%. Compared to OUE C-REIT’s 2026 bond that is yielding ~3.83% with around 4 years left to maturity, we think that the re-tap offers an attractive option for investors as it offers ~37 bps of yield pickup despite having a slight difference of 0.9 years in terms of their remaining time to maturity.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in the OUECT 3.950% 02Jun2026 Corp (SGD) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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