OUE Commercial REIT - CIMB Research 2016-08-03: 2Q16 Driven by organic & inorganic growth

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - 2Q16: Driven by organic & inorganic growth

1HFY16 DPU of 2.68 Scts (+34% yoy) was within consensus and our expectation, forming 52% of our full-year forecast. 2Q16 DPU was at 26% of our FY16F.
Excluding ORP, organic growth in the NPI of the portfolio was 15.9% yoy
Portfolio committed occupancy stable at 94.5%. Average passing rents for all three properties continued to increase.

Looking ahead, supply headwinds could result in moderating rental reversion. Maintain Hold with higher DDM-target price.

Boosted by One Raffles Place (ORP), 2Q16 gross revenue and NPI more than doubled from a year ago to S$45.7m and S$35.2m respectively.
However, finance costs also jumped 2x due to higher borrowings and higher cost of debt of 3.53% (2Q15: 2.81%). As a result, distributable income and DPU grew by 39% yoy and 35% yoy, respectively, to S$17.7m and 1.36 Scts. Excluding ORP, organic growth in the portfolio was 15.9% yoy.

Portfolio occupancy fell 0.3% pt qoq to 94.5% due to Lippo Plaza (LP). Committed occupancy at OUE Bayfront (OUEB) stayed at 98.2% while ORP’s occupancy rose 1.2% pts to 91.8%.
Demand for small spaces of 1,000-3,000 sq ft remained strong, which fits ORP. Occupancy for LP came down to 93.4% (1Q16: 98.1%) due to some supply pressures in Shanghai and recent clamp down on China’s P2P industry. The Manager has since backfilled some of the space and views occupancy of 95% to be sustainable.

For 1H16, OUEB and ORP achieved positive rental reversions of 1.8% and 2.1% respectively, while LP recorded 9% rental uplift. In Singapore, 2Q16 rental reversion was slightly negative, with OUEB recording -0.9% rental reversion. This was mainly due to renewal of a tenant with high passing rent.
Meanwhile, rental reversion for ORP in the quarter was flat. LP recorded a +12.5% rental reversion.
As a result of the YTD positive rental reversion, average passing rents for all three properties continued to increase.

The Manager has brought down its GRI up for renewal from 15.1% at the start of the year to 4.8%. To date, the renewal of all expiring office leases in 2016 for OUEB has been completed.
Meanwhile, 5.4% of ORP’s GRI is up for renewal in 2016. We note that some 50% of its 2017 renewals spring from the retail mall.
Lastly, the Manager has increased the WALE of LP to 3.4 years from 1.6 years a year ago, thanks to the 10-year lease with Victoria’s Secret (scheduled to open in end-16).

Looking forward, we think that supply headwinds could result in flattish to slightly negative rental reversions for ORP. Grade A office spot rent is currently S$9.50 psf/month while the average expiring rent for the property is S$10+. On the other hand, OUEB is protected by income support.
We tweak our FY16-18F DPU by -1%/+1% but increase our DDM-based target price (S$0.70) (due to across-the-board cuts in Rf).
With a projected total return of less than 10%, we maintain Hold on the stock.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-08-03

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.70 Up 0.64