OUE Commercial REIT - Finding the right partner at Bayfront
- 4Q16 results in line; Manager opts to take lower proportion of fees in units, a positive move towards sustainability.
- Income support at OUE Bayfront limits downside to distributions.
- Early refinancing of loans in 2017 a positive.
Impediments to re-rating.
- We maintain our HOLD call on OUE Commercial REIT (OUECT) with a TP of S$0.74.
- While we see long-term value in OUECT as it trades at over 20% discount to its book value and offers >7% yield, we believe the stock will be range-bound in the near term, given the potential operational weakness ahead of new office supply in 2017.
Income support at OUE Bayfront to limit downside to earnings in 2017.
- OUE will be renewing close to 20% of its income in 2017, where market rents are still expected to slide given the excess supply situation.
- We note that there are approximately 12.7% of leases by gross income at OUE Bayfront and 26% at ORP that are up for renewal in FY17. The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15, most likely at a higher base than current market rates. However, we note that the untapped portion of income support at OUE Bayfront allows the Manager to be more discerning in choosing the right tenant mix till it expires at end-2018. Therefore, downside is limited from that property.
4Q16 results in line with expectations:
- 4Q16 operational performance was in line with expectations with a general uptick in organic growth. DPU of 1.18 Scts was c.13.2% lower y-o-y due to one-offs recorded a year ago.
- The Manager has opted to take a lower 20% of base management fees and 50% of performance fees in cash which results in a more sustainable DPU trend going forward.
- Our TP is maintained at S$0.74 based on DCF.
- Stock offers > 7.0% yield.
Key Risks to Our View
- The key risk to our view is a greater-than-expected fall in spot Grade A office rents to below S$7 per square foot per month (psf/mth).