OUE Commercial REIT - CIMB Research 2016-11-01: Operations still hardy despite headwinds

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Operations still hardy despite headwinds

9M16 DPU of 4.0 Scts (+33% yoy) was broadly in line with our and Bloomberg consensus expectations, at 77% of our FY16F. 3Q16 DPU was at 27%.
Portfolio committed occupancy stable at 94.4%, with higher yoy average passing rents at all three properties.
OUEB registered -2.2% rental reversion in 3Q16, OPR -3.1% and LP +13.2%.

1.2% of GRI up for renewal in 4Q16, 26% in 2017. We factor in slight negative to flat rental reversion for expiring leases in 2017.
Reiterate Hold due to limited upside. We expect a meandering recovery.

OUECT achieved a 3Q16 DPU of 1.32 Scts (+25% yoy, -3% qoq), which was within our expectation. Yoy growth was underpinned by full-quarter contribution of One Raffles Place (ORP, acquired in Oct 2015) and improved performance at OUE Bayfront (OUEB) and Lippo Plaza (LP). Excluding ORP, organic growth at NPI level would be 8.5% yoy.
Qoq, operations remained hardy. 3Q16 NPI margin ticked up 2.9% pts to 80% due to lower leasing commissions at LP.

OUE Bayfront (OUEB)’s committed office occupancy rose 1.2% pts qoq to 99.4%. The property registered a -2.2% rental reversion in 3Q16 due to its higher-than-market passing rents, bringing 9M16 rental reversion to +1.2%. Committed rents achieved at OUEB ranged S$10.40-13.20 psf pm. Average passing rent for the property was flat qoq at S$11.85, albeit up 4.1% yoy.

One Raffles Place (ORP)’s committed office occupancy remained stable at 91.7%. The property registered a -3.1% rental reversion in the quarter, bringing 9M16 rental reversion to +0.9%.
Committed rents achieved at ORP ranged S$6.20-10.00 psf pm. The bottom end of the range was due to the leasing of a sub-optimal unit on a low floor. Excluding this, the lower end of the range is S$8.50. Average passing rent inched up c.1% qoq to S$10.36.

Lippo Plaza (LP)’s committed office occupancy was 91.3%, down 2.1% qoq due to departure of some tenants whose leases were not backfilled within the quarter. The property recorded a +13.2% rental reversion in 3Q16, bringing 9M16 rental reversion to 10.3%.
Committed rents achieved at LP was Rmb8.55-11.33 psm pd. Average passing rent increased 4.6% yoy and 1.1% qoq to Rmb9.78.

Gearing stood at 40.8% at end-9M16, with all-in cost of debt of 3.4%. The REIT has no further refinancing requirements for 2016. It refinanced an onshore renminbi loan maturing in 2017 with a new eight-year loan expiring in 2024, at a rate lower than the previous interest rate.
OUECT is in advanced negotiations to refinance the balance of loans (S$346m) maturing in 2017.

According to CBRE, office leasing momentum picked up markedly in 3Q16, resulting in net absorption of 820k sq ft. Core CBD occupancy at end-3Q16 increased 0.8% pts to 95.9%; while Grade A office rents contracted at a slower pace of 2.1% qoq to S$9.30.
That said, with leasing activity driven by relocations, we expect resultant vacancies at secondary offices to be a drag on overall vacancy and rent.
Given the limited upside, we maintain Hold on OUECT. (TP S$0.70)
Upside/downside risks hinge on pace of office recovery

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-11-01

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.700 Same 0.700