OUE Commercial REIT - CIMB Research 2016-05-11: Headwinds could offset positive operating performance

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Headwinds could offset positive operating performance

At 26% of full-year numbers, 1Q16 DPU of 1.32 Scts (+33% yoy) was within consensus expectations.
Excluding ORP, organic growth in the NPI of the portfolio was 7.8% yoy.
Portfolio committed occupancy was steady at 94.8%; rental reversions have moderated, with passing rents at OUEB close to signing rents.
9.1% of GRI is up for renewal in 2016, down from 15.1% at the start of the year.

We resume coverage on OUECT. We introduce FY16-18 forecasts and downgrade to Hold from Add.

Headwinds could offset its positive operating performance.
Boosted by One Raffles Place (ORP), 1Q16 gross revenue and NPI more than doubled from a year ago to S$42.9m and S$33.3m, respectively.
However, finance costs also jumped 1.9x yoy to S$13.8m due to higher borrowings and higher cost of debt of 3.56% p.a. (4Q15: 3.45%).
As a result, distributable income and DPU grew by 35% yoy and 33% yoy, respectively, to S$17m and 1.32 Scts.
Excluding ORP, organic growth in portfolio NPI would have been +7.8% yoy.

Portfolio committed occupancy inched up 0.5% pts qoq to 94.8%. In terms of offices, committed occupancy at OUE Bayfront (OUEB) was maintained at 98.2% while occupancy for ORP ticked up 0.5% pts qoq to 90.6%. Occupancy for Lippo Plaza (LP) eased off 1.1% pts to 98.2%.
Additionally, committed occupancy for retail spaces at LP hiked up to 92.5% (4Q15: 77.7%) with the addition of Victoria’s Secret, which is set to open its first flagship store in China by end-16.

Rental reversions for OUECT have moderated from low-mid teens to low-mid single digits.
For 1Q16, rental reversion for OUEB and ORP was +4.9% and +3%, respectively, while that of LP was +5.3%.
We note that passing rents at OUEB (S$11.82 psfpm for Mar 16) is close to recently signed rents of S$12-12.30 psfpm. Hence, we expect rental reversions to be flattish in the coming quarters.

As at end-Mar, 9.1% of the REIT’s GRI is up for renewal in 2016, down from 15.1% at the start of the year.
To date, the Manager has completed the renewal of all expiring leases in 2016 for OUEB.
Meanwhile, it has reduced GRI up for renewal at ORP to 8.5% (4Q15: 14.9%); and for LP to 20.3% (4Q15: 32.2%). The profile of the tenants at LP means that they only renew leases 3-6 months before expiry.

We resume coverage on OUECT with a Hold as we think that its operating performance would progressively plateau.
We also lower our DDM-based target price to S$0.64.
Given the headwinds in Singapore and Shanghai, we have modelled in subdued rental reversion.
Further, we think that the incoming supply could constrain the Manager’s ability to significantly improve the occupancy at ORP.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-05-11

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 0.64 Down 0.78