OUE Commercial REIT - CIMB Research 2017-11-02: Portfolio Occupancy Continues To Rise

OUE Commercial REIT - CIMB Research 2017-11-02: Portfolio Occupancy Continues To Rise OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Portfolio Occupancy Continues To Rise

  • OUE Commercial REIT (OUECT)'s 9MFY17 DPU was slightly below our expectations, at 70% of our FY17F forecast.
  • Portfolio occupancy improved to 97% in 3Q17 from 96.4% in 2Q17.
  • ORP dragged down by lower retail income on planned asset enhancement initiative.
  • Aggregate leverage to rise to 38.8% post S$75m CPPU redemption.
  • Maintain Hold with a DDM-based TP of S$0.68.

3QFY17 results highlights 

  • OUECT reported a 2.1% decline in 3Q17 revenue to S$43.3m while distribution income came in 3.4% higher yoy at S$17.8m, helped by the absence of manager’s performance fees and higher income support drawdown. However, DPU of 1.15 Scts was 13% lower yoy due to dilution from the private placement done in Mar this year. 
  • For the 9M, DPU of 3.53 Scts made up 70% of our FY17F forecast, slightly below expectations.

ORP performance dipped on weaker retail 

  • Although office portfolio occupancy improved to 97% in 3Q (vs 96.4% in 2Q), topline slipped due to lower retail rental income at One Raffles Place (ORP) as occupancy was affected by the planned asset enhancement initiative. As a result, retail revenue made up a smaller 14% (3Q16: 16.9%) of revenue. The weakness was partly offset by a 5.6% pt yoy improvement in ORP office occupancy to 97.3%. 
  • By property, ORP contributed a smaller 42.6% of total revenue (vs. 44.2% in 3Q16).

Average passing rent at OUEB improved slightly 

  • The slack at ORP was partly picked up by OUE Bayfront (OUEB). Although take up slipped slightly yoy to 98.2% in 3Q, it was still significantly above industry average of 92.5%. 
  • Committed rent achieved for new/renewal leases ranged from S$11.50-13.50psf/ mth vs. average expired rents of S$13.43psf/mth. As a result, average passing rent at the property ticked up slightly to S$11.44psf/mth. 
  • FY17 lease renewals have been completed and the trust has 11.8% of its gross rental income at OUEB due to expire in FY18.

Positive rental renewals at LP 

  • Lippo Plaza (LP) continued to enjoy full occupancy while average passing rent expanded to Rmb9.86psm/day in 3Q vs Rmb9.78psm/day a year ago. The property has 29.8% of its income due to expire in FY18. We anticipate a positive uplift when these leases are renewed.

Gearing expected to remain healthy post part redemption of CPPUs 

  • OUECT’s aggregate leverage ticked up slightly to 36.9% as at end-3Q. The trust issued its maiden S$150m fixed rate notes in Sep 17 and announced plans to redeem S$75m of CPPUs in Oct 17 to mitigate future dilution in DPU from conversion of the CPPUs into units. Post redemption, aggregate leverage is projected to increase to a still-healthy 38.8%.

Maintain Hold 

  • We lower our FY18-19F DPU estimates slightly to factor in the additional S$150m debt that was issued in Sep 17 at a cost of 3.03% as well as relook our forward rental growth assumptions. 
  • Our DDM-based TP remains unchanged at S$0.68. We maintain a Hold rating on the stock. 
  • Upside risk to our call would be a faster-than- projected recovery of the Singapore office leasing market. 
  • Downside risk would a delay in completion of AEI at ORP or a slower than expected office market recovery

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-11-02
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.680 Same 0.680