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.

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.

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.

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.

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.

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.

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