OUE COMMERCIAL REIT
TS0U.SI
OUE Commercial REIT - Headwinds to re-rating
- 1Q16 DPU of 1.32 Scts (+33% y-o-y) was above expectations
- Stronger-than-expected rental reversions
- Moving to a more sustainable DPU, paying 20% of base fees in cash versus 100% in units previously
Impediments to re-rating.
- We maintain our HOLD call with a revised TP of S$0.70.
- We believe investors will remain wary of OUECT although the REIT is trading at only 30% of its book value, given fears over falling office rents ahead of the impending 4.5m sqft of new office space over 2016-2017.
- Combined with OUECT’s above-average gearing (around 40%), in our view, its share price is likely to remain range bound in the near term.
Uplift from One Raffles Place (ORP).
- With an income support arrangement offering income stability to OUE Bayfront, contributing a third of net property income (NPI) till 2018, earnings upside comes from driving better performance at ORP (c.50% of NPI).
- With initial yields estimated at 3.4%, the manager is actively seeking to push occupancy rates closer to c.95% from c.91% currently.
Earnings risk more likely in FY17.
- As OUECT’s proactive forward renewals have reduced the number of leases expiring in FY16, we believe the greatest earnings risk for OUECT is in FY17, rather than in FY16.
- Approximately 20% and 26% of leases by NLA at OUE Bayfront and ORP respectively are up for renewal in FY17.
- Risk of negative rental reversions also arises as the rents for these leases were originally signed during the better times in FY14/15. The magnitude of falling rents is still uncertain as it is unclear how aggressive the new office buildings' management will be in discounting their rental rates.
Valuation:
- Given better-than-expected 1Q16 results, we raised our FY16- 17F DPU by 1-2% and increased our DCF-based TP to S$0.70 from S$0.65 previously.
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 psf/mth. Our current assumption is for rents to bottom out around S$8-9 psf/mth.
Mervin Song CFA
DBS Vickers
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Derek Tan
DBS Vickers
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http://www.dbsvickers.com/
2016-05-12
DBS Vickers
SGX Stock
Analyst Report
0.70
Up
0.65
