OUE Commercial Real Estate Investment Trust (OUECT) is one of Singapore’s largest diversified REITs with a market cap of S$2.15bn as at 7 June 2021. It owns a portfolio of 7 prime office, retail and upscale hotel properties in Singapore (91% of FY20 revenue) and Shanghai, China (9%). As at 30 December 2020, the portfolio was valued at S$6.5bn and comprised of commercial (62% FY20 revenue), hospitality (23%) and retail (15%) segments. OUECT is managed by OUE Commercial REIT Management Pte. Ltd. and sponsored by OUE Limited. OUECT has the right of first refusal over its sponsor’s income-producing commercial, hospitality and integrated development properties. As at 31 March 2021, OUECT is 48% owned by OUE Group which provides support to the REIT.
Portfolio details:
- OUE Bayfront: 50% stake, 20.3% of FY20 revenue
- One Raffles Place: 67.95% stake, 25.2% FY20 revenue
- OUE Downtown Office: 14.7% stake
- Lippo Plaza: 91.2% strata interest, 8.9% of FY20 revenue, located in prime commercial district of Huangpu in Puxi, Shanghai
- Mandarin Gallery: high-end retail mall, 7.8% of FY20 revenue
- Mandarin Orchard Singapore: 1,077-room hotel, 15.4% of FY20 revenue
- Crowne Plaza Changi Airport: 563-room hotel, 7.7% of FY20 revenue
Credit metrics as at 31 March 2021:
- Aggregate leverage: 40.4%
- Interest coverage: 2.6x
Commentary
+ Hotels have minimum income until 2028. Mandarin Orchard Singapore and Crowne Plaza Changi Airport’s master lease agreements are subject to a minimum rent of S$45.0mn and S$22.5mn per annum respectively, totalling S$67.5mn (~50% of FY19 hospitality revenue) per annum until 2028. This provides downside protection amid weakness in hospitality and closure of one tower of Mandarin Orchard Singapore for renovation, which is expected to reopen in 2022 re-branded as Hilton Singapore Orchard.
+ Singapore offices saw positive rental reversions. For 1Q21, rental reversions for OUECT’s Singapore office properties ranged from 0.8% to 7.2% YoY. The trend of positive rental reversions was sustained since 2018. With the expected withdrawal of some office buildings for redevelopment such as Fuji Xerox Towers, Grade A CBD supply growth will be moderated in 2021 and downward pressure on rents is expected to stabilise by year-end.
+ Ability to sell assets at a premium. On 31 March 2021, OUECT completed a 50% divestment of OUE Bayfront to the European fund, Allianz Real Estate-managed fund, for net proceeds of S$262.6mn and net divestment gain of S$26.3mn. OUECT was able to sell at valuations 7.3% over book value. Amid the low interest rate environment, particularly in Europe, European funds are seeking attractive yielding assets and willing to pay at premium. A portion of the sales proceeds will be used to repay S$155mn of convertible perpetual preferred units.
Negatives
– High lease expiries to weigh on occupancies. For the commercial segment, 24.5% of gross rental income is expiring in 2021, of which 4.8% was renewed or secured for new leases as of 1Q21. All of OUECT’s offices are below market average occupancies except for OUE Bayfront. The prime retail Mandarin Gallery sees 29.9% of gross rental income expiring in 2021, with 5.6% secured as of 1Q21. Tenant retention remains priority for OUECT.
– Tight interest coverage. OUECT’s interest coverage ratio was 2.6x for 1Q21, tracking closely to the MAS minimum of 2.5x. Aggregate leverage stood at 40.4% as at 31 March 2021, around management’s internal target of 40%.
Summary
OUECT’s operating metrics remain soft as COVID-19 trends impact prime commercial and retail occupancies. Nevertheless, we are sanguine on the company’s credit profile given the attractiveness of OUECT’s prime assets to yield hunting investors despite the muted leasing environment.
