OUE Commercial REIT - DBS Research 2015-11-12: One Raffles Place To Drive Earnings

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OUE COMMERCIAL REIT TS0U.SI 

OUE Commercial REIT - One Raffles Place To Drive Earnings 

Increased diversity from the acquisition of a quality asset. 

• We believe that OUE CT will achieve a new milestone with the acquisition of ORP which will provide the trust with significant operational scale (NLA doubled to c.1m sqft) and operational flexibility as we see the manager being able to market to a wider tenant base, which will result in improved tenant retention rate. 

Stable DPU outlook; earnings uplift from One Raffles Place. 

• With an income support arrangement offering income stability to OUE Bayfront, contributing c.33% of net property income (NPI) till 2018, we see upside coming from driving better performance at One Raffles Place (c.49% of NPI). 
• With initial yields estimated to be 3.4%, the manager is actively driving operational performance by pushing occupancy rates higher to c.95%, actively marketing the vacant spaces and also raising average rent for the property. 
• We forecast the property to achieve a yield of 4.0% by the end of 2016. 

3Q15 operational performance remains on track. 

• Net property income and revenues rose steadily by 5.7% and 4.7% y-o-y respectively. 
• Rental reversions remain healthy for its OUE Bayfront (+23.5% YTD) and Lippo Plaza (+10.7% YTD) but we expect it to moderate, given increased competition for space. 

Valuation: 

• We maintain our HOLD call with TP of S$0.67 based on DCF. 
• While valuations are attractive at current levels (0.8x P/NAV and yields of c.7.0-7.2%), we believe that upside will be capped by a weak operational outlook, coupled with its larger office peers trading at similar yield levels. 

Key Risks to Our View: 

Interest rate risk. 

• A rise in interest rate will have a negative impact on distributions. However, the manager actively manages its exposure through forward hedges and has locked in c.64% of its interest cost into fixed rates.

Derek Tan DBS Vickers | Mervin Song DBS Vickers | http://www.dbsvickers.com/ 2015-11-12

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.67 Same 0.67