SINGAPORE (Apr 8): OUE Commercial REIT (OUE C-REIT) and OUE Hospitality Trust (OUE H-Trust) is proposing a merger to create one of the largest diversified S-REITs with total assets of up to $6.8 billion.

The proposed merger will be effected by way of a trust scheme of arrangement with OUE C-REIT acquiring all the issued and paid-up securities in OUE H-Trust in exchange for a combination of cash and new units in OUE C-REIT.

Under the scheme of consideration, stapled securityholders of OUE H-Trust will receive 1.3583 new OUE C-REIT units and 4.075 cents in cash for each stapled security they hold.

Units in OUE C-REIT and OUE H-REIT last traded at 52 cents and 74 cents respectively on Friday before a trading halt for the announcement was called.

Following the proposed merger, OUE Group will continue to retain a significant stake of 48.3% of the total issued units in the enlarged REIT.

According to the filing this morning, the proposed merger will be distribution per unit (DPU) accretive on a historical pro forma basis for both OUE C-REIT unitholders and OUE H-Trust stapled securityholders by 2.1% and 1.4% respectively, for the 12-month period ended Dec 31 2018.

“The enlarged REIT is expected to benefit from a significant increase in market capitalisation to approximately $2.9 billion as well as a larger free float of approximately $1.1 billion,” say OUE C-REIT and OUE H-Trust in a joint release.

“This is expected to lead to higher trading liquidity, potential index inclusion, and a wider investor base. Following the Proposed Merger, the enlarged REIT could also potentially enjoy a positive re-rating that will benefit all unitholders in the long-term,” they add.

With a larger capital base, the enlarged REIT will have an increased funding capacity of approximately $1.024 billion, enhancing the enlarged REIT’s ability to deliver long-term growth through value accretive acquisitions and asset enhancement initiatives.

Following the merger, the combined portfolio will have seven properties across three asset classes – office, hospitality, and retail. This will reduce the concentration risk associated with exposure to any single real estate asset class. Under the combined portfolio, no single property will represent more than 27% of the total value.

The commercial portfolio will include 1.9 million sf of prime office space in the core central business district and approximately 306,000 sf of prime retail space, putting the enlarged REIT in a strong competitive position. Likewise, the hospitality portfolio, which will include upscale hotels with an aggregate of 1,640 rooms.

Among other approvals needed, OUE C-REIT will also be required to seek the approval of its unitholders at an extraordinary general meeting to be convened.

In a Soochow CSSD Capital markets note this morning, OUE C-REIT is trading now at 0.74x P/B while OUE H-Trust is at 0.97x P/B so the gross ratio exchange of 1.43x implies that OUE H-Trust is being bought at 1.06x P/B which is in line with consensus analysts’ target price.

“On a first look, this looks like a reasonable deal as it gets tougher for OUE C-REIT to acquire assets trading deep below its book value – this transaction could change that with bigger REIT, higher liquidity, bigger leverage,” says analyst Tata Goeyardi.

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