OUE Commercial REIT has announced a 5-year SGD bond offering at an initial price guidance of 4.15%. Here are our thoughts on the new issue and a brief outlook on the industry.

Dexter Tan Published on 27 May 2021

With more employees working from home amidst the recent rise in Covid-19 infections, OUE Commercial Real Estate Investment Trust (“OUE C-REIT”) is launching new 5-year SGD bonds at an initial price guidance (“IPG”) of 4.15%.

About the bonds

These senior unsecured bonds are issued by OUE CT Treasury Pte Ltd under the terms of the SGD 2 billion multicurrency debt issuance programme dated 20 Mar 2020. Net proceeds from the bonds will be used for working capital and to refinance existing borrowings.

Under the terms of the debt offering, bondholders have the right to sell back their holdings at par upon the cessation or suspension of listed units. The bonds are redeemable in the event of a termination of OUE C-REIT. The issuer may also redeem the bonds for taxation purposes or if there is a minimal outstanding amount.

About OUE Commercial REIT

OUE C-REIT is a diversified REIT with a portfolio of retail, hospitality and office properties. There are 7 properties in its portfolio – OUE Bayfront, One Raffles Place, OUE Downtown Office, Lippo Plaza, Mandarin Gallery, Mandarin Orchard Singapore and Crown Plaza Changi Airport. The portfolio has a net lettable area of more than 2 million square feet with a total asset value of SGD 6.8 billion as at 31 Dec 2020.

Three of the Grade A office buildings – OUE Bayfront, One Raffles Place, OUE Downtown Office – are located in the central business district of Singapore. Lippo Plaza is located along the Huaihai Zhong Road within the commercial district of Huangpu in Puxi, Shanghai.

Mandarin Gallery is a retail mall along Orchard Road with four levels of flagship stores and restaurants. The neighboring property, Mandarin Orchard Singapore is also managed by OUE C-REIT with 1,077 hotel rooms. However, Mandarin Orchard Singapore will be re-branded as Hilton Singapore Orchard in 2022. It will be Hilton’s flagship hotel in Singapore and its largest in Asia Pacific.

The second hospitality asset – Crown Plaza Changi Airport is situated in Changi Airport and the hotel is managed by the InterContinental Group. There are 563 rooms in this property that are accessible by travelers through the arrival and departure levels.

About the Sponsor and income support

OUE Limited (“OUE”) is the sponsor of the trust. OUE Limited is an operator, owner and property developer with a sizable in Asia. The group is listed on the Singapore Exchange with a market capitalization of SGD 1.27 billion as of 25 May 2021. As of 2020, OUE recorded a group turnover of SGD 530.5m and total assets of SGD 9.62 billion. The sponsor’s commitment is demonstrated by its 48.0% stake in the REIT.

The trust also benefits from master lease arrangements at Mandarin Orchard Singapore and Crowne Plaza Changi Airport, where the master lessee provides SGD 67.5m of minimum rental per annum (Mandarin Orchard Singapore: SGD 45.0m; Crowne Plaza Changi Airport: SGD 22.5m).

The master lease agreement for Mandarin Orchard Singapore expires in July 2028, and OUE (the master lessee) has the option to renew the agreement for another 15 years. Likewise, the master lease agreement for Crowne Plaza Changi Airport expires in May 2028. OUE Airport Hotel Pte. Ltd., being the master lessee may renew the agreement for an additional two consecutive 5-year terms. 

Furthermore, OUE C-REIT may receive income support for OUE Downtown Office up to an aggregate amount of SGD 60m or until 2023, whichever occurs earlier. In 2020, the trust received SGD 16.517m under the Deed of Income Support on OUE Bayfront.

Recent financial performance

Revenue is derived from the abovementioned 7 properties where 62.5% of the revenue is contributed by the portfolio’s office properties. As seen in Figure 1, OUE Bayfront and One Raffles Place are the two largest assets with the biggest revenue contributions. Hospitality and retail activities contributed 22.6% and 14.9% of total revenue, respectively.

Figure 1: Portfolio composition as of 1Q21

Total REIT revenue fell 3.9% YoY to SGD 74.7m in the quarter ended 31 Mar 2021 (“1Q21”). After completing its 50% divestment in OUE Bayfront to Allianz Real Estate-managed fund by March, OUE C-REIT recognized a net divestment gain of SGD 26.3m. Net property income fell slightly by 1.6% YoY to SGD 61.1m, due to provisions of rental rebates to tenants, which was partially offset by lower operating expenses. After taking into account other income and operating charges, the amount available for distribution increased by 2.7% YoY to SGD 37.1m.

Figure 2: Singapore CBD Grade A office rental rates and occupancies

According to Coldwell Banker Richard Ellis research (“CBRE”), Grade A office rental rates in Singapore have been on a downtrend since the onset of the Covid-19 pandemic (Figure 2). Rental rates fell from a monthly rate of SGD 11.55 per square foot (“psf”) in 4Q19 to SGD 10.4 psf in 1Q21. Meanwhile, office occupancies dropped from 97.6% to 96.7% in the same period.

The outlook for commercial properties is likely to remain weak given that the amount of supply is projected to increase in the next few years. Barring a delay in construction activities, forecasted central area office supply will reach 0.9m square feet in 2021, 0.7m square feet in 2022 and 1.3m square feet in 2023.

Figure 3: Singapore office net demand and supply

Prospects for office rentals and occupancy rates in Shanghai are also weak. Due to an abundant supply and weak tenant demand, rents and occupancies have been on a decline. Vacancies have climbed to the highest level since 2009. Office supply in the Shanghai CBD is expected to increase to 311’000 square meters (“sqm”) in 2021 and 649’000 sqm in 2022, before falling to 564’000 sqm in 2023.

Figure 4: Shanghai office rental and occupancy rates

Financial position and credit highlights

At the end of December 2020, OUE C-REIT recorded a SGD 88.5m cash position, made up of SGD 41.7m of cash at banks and SGD 46.8m of short-term deposits with financial institutions. The level of cash is small compared to its SGD 2,335m of total borrowings but the company indicated that SGD 400m of its debt due in 2H21 will be refinanced ahead of maturity (Figure 5). In December last year, the REIT obtained SGD 900m of loan facilities and used SGD 450m to refinance the 2021 debt. The loan facilities were subsequently upsized to SGD 978m in March 2021.

If the company raises at least SGD 100m from this proposed debt offering, we believe that there is adequate liquidity to cover the REIT’s borrowings till 2022. If need be, the REIT may also divest a part of its SGD 5.37 billion of investment properties (as at 2020) to meet debt obligations.

Figure 5: Debt maturity profile as at 31 Mar 2021

Earlier this year, OUE C-REIT divested 50.0% of its interest in OUE Bayfront to BPH LLP and refinanced its loan attributable to OUE Bayfront with a new five-year facility (“BPH Propco LLP SGD Loan”).

The REIT has taken active steps to pay down indebtedness as total borrowings have declined from SGD 2,664m in 2020. Furthermore, the manager of OUE C-REIT announced earlier this month that it would be redeeming SGD 155m of its convertible perpetual preferred units (“CPPUs”). These preferred units were issued to Clifford Development Pte. Ltd. as partial payment of its 83.33% acquisition in OUB Centre Limited. On a side note, Clifford Development Pte. Ltd. is a subsidiary of OUE Limited. As mentioned in its announcement, 220m of the CPPUs will remain outstanding after the redemption.

According to the company, the REIT’s aggregate leverage dropped from 41.2% in 2020 to 40.4% on 31 Mar 2021. Interest coverage ratio decreased from 2.7x in 2020 to 2.6x on 31 Mar 2021, but remained at a healthy level. At this point in time, the REIT’s estimated net debt to equity of ~69.1% as at 2020 is still manageable in our view.

Comments on pricing

The proposed 5-year SGD issue from OUE CT Treasury Pte. Ltd. has an attractive initial price guidance of 4.15%. With an I-spread, or credit spread of 319 basis points (“bps”) above the 5-year SGD Swap Offer Rate (“SOR”), the new issue’s 4.15% IPG has the highest credit spread among comparable bonds of commercial REIT issuers (Figure 6).

Figure 6: Relative valuation of comparable notes using I-spreads

We also think that the FCOTSP 3.185% 23Feb2023 Corp (SGD) has an attractive I-spread of 281bps with 1.76 years to maturity. The FCOTSP 3.185% 2023’s are guaranteed by Frasers Commercial Trust (“FCT”), which is a sub-trust of Frasers Logistics & Commercial Trust (“FLTSP”). FCT has been assigned issuer ratings of Baa2 by Moody’s Investors Service. The trust manages a portfolio of 7 commercial properties while FLTSP oversees a total of 97 properties. FLTSP is rated BBB+ by S&P. 

Figure 7: Relative valuation of comparable notes using yield-to-maturity

Even though the OUECT 4.000% 24Jun2025 Corp (SGD) and the new 5-year issue have a small credit spread difference of only 30bps, the 4.15% IPG represents a decent yield pickup of 57bps given that the OUECT 4% 2025’s are trading at a yield-to-maturity (“YTM”) of 3.58%. We think that the initial price guidance of 4.15% is attractive to investors as it represents a 57bps yield pickup for a year tenor difference. Both notes also have similar bond features.

As a summary of our earlier points, although there may be continued signs of weakness in the commercial property sector, we feel that OUE C-REIT has an adequate liquidity profile. The trust has already taken active steps to lower gearing and divest part of its stake in OUE Bayfront. We are comfortable with the issuer’s credit quality considering that the company was able to refinance its near term loans. Additionally, the REIT enjoys certain income support from its Sponsor and has a large investment property portfolio.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd (“IFPL”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.

Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsm/fsm/disclaimer).

iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore (‘MAS’) to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report’s contents, IFPL’s nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.

Please note that only certain bond(s) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to Fundsupermart.com’s prevailing policies and procedures. Please read our full disclaimers in the website.