• OUECT has proposed to acquire OUE Downtown office towers for S$908m.
• Transaction NPI yield of 5%; deal to expand exposure to the key nodes within Singapore CBD.
• Purchase to be funded by a S$587.5m equity fund raising and S$361.6m debt.
• Maintain HOLD with a rights-adjusted Target Price of S$0.60.

To Buy OUE Downtown Office Towers

• OUECT announced the proposed acquisition of the office component of OUE Downtown for S$908m (S$1,713psf) or at a 2-3.9% discount to independent valuations of S$927m- 945m.
• The property comprises 2 office towers with a total lettable area of 529,981sf and has a committed occupancy of 95.1%. Key tenants include Deloitte & Touche, Aviva and Moody's Analytics. The building is located close to the Tanjong Pagar, Downtown and upcoming Shenton Way and Prince Edward MRT stations.
• The transaction is subject to unitholders’ approval at an EGM, scheduled on 28 Sep 18.

Transaction NPI Yield of 5%

Transaction NPI yield is at 5%, inclusive of an aggregate amount of S$60m of rental support or for a period of up to 5 years, whichever is earlier, and is higher than existing portfolio yield of 4%. 

The rental support is based on a target base gross rent of S$8.90- 9.40psf between 2018 and 2023. Excluding the top-up, we estimate net yield would have been closer to the mid-3% level, based on the average passing rent of S$7psf/month. This is below the current Shenton Way/Tanjong Pagar spot rent of S$8.43psf, based on Colliers research. 

This will enable the property to enjoy positive rental uplift when leases are renewed. About 73.6% of the NLA is due to expire during 2H18-2020.

Acquisition to be Funded With An Equity and Debt Exercise

Total transaction cost of S$955.9m will be funded via a rights issue of S$587.5m, debt of S$361.6m and acquisition fees in units of S$6.8m. The fully underwritten and renounceable rights issue will be at a basis of 83 rights for every 100 existing OUECT units at a price of S$0.456/rights unit. The rights price is at a 31.4% discount to OUECT's 10 Sep closing price and a 20% discount to the theoretical ex-rights price of S$0.57.

The Sponsor has undertaken to fully subscribe for its pro-rata entitlements of the rights issue and sub-underwrite 66% of the rights units to be underwritten by the lead managers and underwriters.

Post transaction, OUECT's aggregate leverage is expected to improve to 39.8% from 40.3% at end-Jun 18.

Increasing Exposure to Key CBD Nodes

We think the acquisition of OUE Downtown is timely, given the recovery in the office leasing market with a diversified tenant mix as well as benefit from the transformation of Tanjong Pagar. The purchase will expand OUECT's portfolio NLA to 1.6msf valued at S$4.4bn, of which 83% is located in key nodes within the Singapore CBD.

Balance sheet is also strengthened with a higher potential debt headroom of S$399m, based on the 45% ceiling.

Maintain HOLD

We lower our FY18-20F DPU estimates by 5.2-20.7% to factor in the additional contributions from OUE Downtown office, assuming deal completion by Nov 18, as well as dilution from the rights issue. Accordingly, our DDM-based Target Price is lowered to S$0.60.

We expect OUECT’s share price to be range bound in the near term as investors digest the equity exercise.

Upside risks to our call include a faster-than-expected office rental market recovery and a more optimal capital structure.

Downside risks include macro headwinds that could slowdown office demand.

Source: CGS-CIMB Research - 11 Sep 2018