OUE Commercial REIT - CIMB Research 2017-08-03: Stable Operationally

OUE Commercial REIT - CIMB Research 2017-08-03: Stable Operationally OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Stable Operationally

  • OUECT's 2Q and 1HFY17 DPU were slightly below our expectations at 22% and 41% of our FY17 forecast, respectively.
  • Portfolio committed occupancy slightly higher at 96.4%.
  • OUE Bayfront’s (OUEB) saw negative rental reversions; occupancy at One Raffles Place (ORP) improved.
  • Healthy balance sheet post placement exercise in Mar.
  • Maintain Hold with a lower target price of S$0.68.

2Q17 results highlights 

  • OUECT reported a 15.4% drop in 2Q17 DPU to 1.15 Scts despite a 0.6% increase in distribution income, slightly below our expectations and making up 22% of our FY17 forecast. This was due to dilution from an 18% increase in issued units base following a S$150m placement in Mar. 
  • Gross revenue showed a 3.2% yoy dip, largely due to the absence of one-off items. However, better cost management and interest savings helped lift the bottomline.

OUEB performance 

  • OUE Bayfront’s (OUEB) committed occupancy improved slightly yoy to 98.9%, although down 1.1% pt from a quarter ago. 
  • Committed rent achieved was in the range of S$10.85- 14psf/mth against an average expiring rent of S$15.50psf. As such, average rent slipped 2.1% qoq and 3.5% lower yoy to S$11.42psf/mth. About 80% of OUEB’s gross rental income is set to expire from FY19 onwards. 
  • Meanwhile, OUECT has forward renewed 4.8% of its FY18 expiries, thus giving the trust better forward income visibility.

Occupancy grew at ORP 

  • One Raffles Place (ORP) enjoyed a 2% pt hike in office occupancy to 95% while committed office rents were in the range of S$8-11.80psf, stable qoq, as sentiment in the office sector improved. Average passing rents slipped 0.7% qoq to S$10.14psf/mth.
  • Another 6.9% of leases are due to be re-contracted in 2H17 and 34.3% in FY18. This should enable it to benefit from the anticipated office leasing market recovery. 
  • Retail occupancy dipped to 87.7% as the manager continued to remix tenancies.

LP enjoyed full committed occupancy 

  • Meanwhile, Lippo Plaza (LP) enjoyed full committed occupancy, outperforming the broader Shanghai market, while the average passing rent was higher vs. a year ago at Rmb9.84psm/day. The property has c.29.2% of gross rental income due to be renewed in FY18.

Gearing remains at 36.4% 

  • OUECT’s aggregate leverage stayed steady at 36.4% as at 2Q17 post a S$150m placement exercise in Mar. Average cost of debt was steady at 3.4% with no refinancing needs till end-2018. 80.7% of OUECT’s debt is on a fixed rate basis, thus cushioning the trust against fluctuations in interest rates.

Maintain Hold 

  • We lower our FY17-19 DPU estimates by 10-12% to factor in the dilution from the units placement, net of interest savings. Accordingly, our DDM-based TP is lowered to S$0.68.
  • We believe the medium-term office outlook is positive as leasing activities showed some signs of stability in 2Q as the supply overhang continued to be digested. 
  • In the near term, we anticipate further negative reversions as the existing leases are rolled over. 
  • Upside risk: a faster office recovery. 
  • Downside risk: protracted slow economic growth.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-08-03
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.68 Down 0.710