OUE Commercial REIT - DBS Research 2016-05-12: Headwinds to re-rating

OUE Commercial REIT - DBS Research 2016-05-12: Headwinds to re-rating 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.


  • 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 | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-05-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.70 Up 0.65