OUE Commercial REIT - DBS Research 2016-11-02: Concerns to weigh on share price

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Concerns to weigh on share price

We maintain our HOLD call for OUE Commercial REIT (OUECT) with a revised TP of S$0.74.
While we see long term value in OUECT as it trades at over 20% discount to its book value and offers >7% yield, we believe the stock will be range bound near term, due to its above-average gearing (around 41%), relatively small capitalisation and fears over falling office rents ahead of new office supply in 2017.

With an income support arrangement providing income stability to OUE Bayfront, contributing a third of net property income (NPI) till 2018, earnings upside would come from driving a better performance at ORP.
With initial yield estimated at 3.4%, the Manager is actively seeking to push occupancy rates closer to c.95% from c.91% currently.

As OUECT’s proactive forward renewals have reduced the number of leases expiring in FY16, the greatest earnings risk for OUECT is in FY17. There are approximately 16% of leases by net lettable area (NLA) at OUE Bayfront and 26% at ORP that are up for renewal in FY17.
The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15. The potential magnitude of falling rents is still uncertain as it is unclear how aggressive the management of the new office buildings will be in discounting rental rates.

Given the better-than-expected 3Q16 results, we increased our DCF-based TP to S$0.74 from S$0.73 previously.

The key risk to our view is a greater-than-expected fall in spot Grade A office rents to below S$7 per square foot per month (psf/mth).

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2016-11-02

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.74 Up 0.730