OUE Commercial REIT (OUECT SP) - DBS Research 2017-08-03: Continued Improvement In Occupancy

OUE Commercial REIT (OUECT SP) - DBS Vickers 2017-08-03: Continued Improvement In Occupancy OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT (OUECT SP) - Continued Improvement In Occupancy

  • OUECT's 2Q17 DPU down by 15.4% due to unit base dilution from recent placement, despite 0.6% increase in NPI.
  • Portfolio occupancy continued to improve, led by One Raffles Place.
  • No acquisitions on the near-term radar.
  • Target Price inched up to S$0.69 after rolling earnings forward; maintain HOLD.

What’s New 

DPU dragged by equity placement. 

  • 2Q17 headline DPU fell 15.4% y-o-y to 1.15 Scts, largely on account of the recent S$150m private placement, but on an undiluted basis, DPU would have been flat y-o-y. 
  • Revenue for the quarter was 3.2% lower y-o-y at S$44.2m despite flat rental income, due to the absence of pre-termination compensation, a one-off income recognised in 2Q16. 
  • NPI was down by only 1.3% yo-y at S$34.8m due to savings from lower property tax expenses this quarter. Borrowing cost was down by 18.2% to S$11.3m, thanks to partial debt repayment following the private placement. 
  • 1H DPU represents 52.7% of our FY17F DPU, marginally ahead of our expectations.

Occupancy at One Raffles Place increased the most in six quarters. 

  • Portfolio occupancy increased for the fourth consecutive quarter, rising to 96.4% from 95.8% at the end of 1Q17. 
  • On an individual property basis, OUE Bayfront saw a dip of 1.1ppt to 98.9%, One Raffles Place was up 2.0ppt – the highest increase in the last six quarters – to 95.0%, and Lippo Plaza leaped by 4.2ppt to full occupancy. 
  • The improvement in occupancy is commendable as the broad office markets of Singapore and Shanghai still experienced occupancy decline over the quarter. The increase at One Raffles Place and Lippo Plaza was primarily from expansion of existing tenants generally from the IT (such as cyber security) and finance (such as fund management and private wealth) industries which generally occupy 5,000-6,000 sqft of space. 
  • The Manager believes the new demand for size also comes from these sectors.

Negative rental reversion despite still higher-than-market rents. 

  • Over the quarter, OUECT was able to achieve higher-than-market rents for new and real leases. However, it reported negative rental reversions on average. 
  • For OUE Bayfront, committed rents in the quarter were between S$10.9-14.0 psf/mth, lower than the average expiring rents of S$15.5 psf/mth, while average passing rents dipped to S$11.67 in 2Q17 from S$11.42 in 1Q17. 
  • A more moderated decline was seen at One Raffles Place and Lippo Plaza, where average rents fell from S$10.27 psf/mth and RMB9.88 psm/day to S$10.14 psf/mth and RMB9.84 psm/day respectively. 

Minimal lease due in 2H17. 

  • Post the renewals of 14.9% by NLA, only 4.2% of leases will be due in 2H17.

New tenants at One Raffles Place Shopping Mall. 

  • The Manager has been replacing some retail tenants at the mall with those with higher patronage frequency. New merchants like foodjunction, Ya Kun Kaya Toast, and Jewel Coffee have been introduced. 
  • Going forward, more F&B operators will be brought in to fit the clientele of the mall.

No acquisitions in the near term. 

  • Although always on the agenda, acquisitions do not appear to be on the Manager’s radar in the near term. The rationale of the equity placement was more to enlarge unitholder’s base and improve trading liquidity.

No refinancing requirements till late-2018. 

  • OUECT has no refinancing requirements in 2017, the next borrowing only becomes due in late 2018. The average term of debt is 3.1 years. 
  • Aggregate leverage stayed stable over the quarter at 36.4% with a weighted average cost of debt of 3.4% p.a.

Our View 

Maintain HOLD, TP inched up to S$0.69. 

  • We have raised our TP slightly from S$0.67 to S$0.69 as we rolled over earnings for a financial year. 
  • With OUECT expected to report a y-o-y decline in DPU in FY17 due to the equity placement, and no foreseeable acquisitions to deploy the capital, we believe the stock price will be range bound. Thus, we maintain our HOLD call with 6.2% forward yield.

Singapore Research DBS Vickers | Melvin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-03
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.69 Up 0.670