SI Research: OUE – Killing Two Birds With One Stone

According to flash estimates released by the Urban Redevelopment Authority on 1 October 2018, the widely-watched private residential property price index has only inched up marginally by 0.5 percent in the third quarter of this year, much lower in contrast to the 3.9 percent and 3.4 percent growth registered in the first and second quarter respectively. Amidst a slowdown in properties sales after the introduction of the latest cooling measures that took effect in July 2018, innovative techniques which developers adopted to raise capital and boost revenue can sometimes be quite an eye-opener. OUE limited is one such case in point.

Disposal Of OUE Downtown

On 11 September 2018, OUE announced the disposal of the office components of mixed-used development OUE Downtown, comprising two high-rise office towers – 50-storey OUE Downtown 1 and 37-storey OUE Downtown 2 – to OUE Commercial Real Estate Investment Trust (OUECR).

To fund this proposed purchase, OUECR intends to undertake a combination of debt financing of $361.6 million as well as rights issue to unitholders at 83 rights units for every 100 units held to raise gross proceeds of $587.5 million. The issue price of $0.456 per rights unit represents a 31.4 percent discount to the REIT’s closing price at $0.665 on 10 September 2018, being the last trading day of OUECR prior to the announcement.

Cash Proceeds From The Divestment

The purchase consideration of OUE Downtown negotiated on a willing-buyer and willing-seller basis stood at $908 million. Taking into consideration an estimated $328.3 million set aside for the subscription of OUECR’s rights units which OUE had committed, the developer can expect to receive net cash proceeds of more than $500 million from the deal.

Furthermore, as the manager of OUECR is also a wholly-owned subsidiary of OUE, the group also stood to benefit from the transaction through earning the acquisition fee of $6.8 million, being 0.75 percent of the purchase consideration.

Apart from unlocking value from its quality assets, divestment of properties to its REIT platforms allows OUE to re-invest the recycled capital back into higher-yielding projects so as to maximize returns. For instance, acquisition of OUE Lippo Healthcare (former International Healthway Corporation) in April 2017 as well as the recent purchase of an interest in Bowsprit Capital Corporation (Manager of publicly listed First REIT) are examples of promising endeavours paving the way for OUE to foray into the attractive Asian healthcare real estate sector.

Enhancing Recurring Income

On the face of it, it seems as though OUE had disposed of a quality commercial property it owned in the heart of Singapore’s central business district. Nonetheless, it is worthy to note that the group has a 55.9 percent stake in OUECR as at September 2018. Meaning to say, OUE is still very much in control of how OUE Downtown is going to be managed or developed even after the transaction.

The acquisition of OUE Downtown is going to raise OUECR’s asset under management (AUM) by about 26.2 percent from $3.5 billion to around $4.4 billion. This, together with OUE Hospitality Trust’s AUM of $2.2 billion as well as First REIT’s estimated property portfolio of $1.3 billion, brought OUE’s REIT asset management business to be valued at approximately $7.9 billion. With a larger asset base, the group can enjoy recurring management fees alongside stable streams of growing distributable income from its REITs.

Heavily Discounted Price-to-book

Closing at $1.46 a share as at 15 October 2018, OUE’s current share price is heavily discounted against its net asset value of $4.49 as at June 2018. The price-to-book ratio merely stood at 0.3 times, which is unjustifiably depressed in our opinion.

OUE’s injection of assets into its REITs platforms is not the first of its kind that we have seen. Back in 2016, the group has also divested the extension of Crowne Plaza Changi Airport to OUE Hospitality Trust bagging $205 million of revenue in the process. And neither do we think that OUE Downtown’s divestment would be the last given the possibility of Downtown Gallery (a retail podium) and Oakwood Premier (a serviced residence component) in the pipeline to be liquidated in a similar manner.

By doing so, not only can OUE gain immediately from unlocking capital with the sale proceeds, the group may continue to benefit from the assets through increased management fees and distributions. This is a rather astute and well-played move to unlock value for shareholders the way we see it. To say the least, we are impressed.