OUE Commercial REIT - CIMB Research 2018-01-31: Improved Office Performance

OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Improved Office Performance

OUE Commercial REIT's 4Q/FY17 DPU met our expectations at 24.1%/98.6% of our FY17 forecast.
Narrowing negative rental reversion gap amid high portfolio occupancy.
Aggregate leverage to rise to 40.3% post S$100m CPPU redemption.
Maintain HOLD with a higher Target Price of S$0.75.

OUE Commercial REIT (OUECT) reported 4Q17 gross revenue and distribution income of S$44m, -2.3% y-o-y. However, distribution income was up 14.6% y-o-y to S$17.7m due to lower interest costs, management fees and higher income support.
FY17 distribution income of S$69.9m was up 3.8% y-o-y. 4Q/FY17 DPU of 1.14 Scts/4.67 Scts was 3.4%/9.8% lower y-o-y due to an enlarged units base following a private placement exercise conducted earlier.
Book NAV rose to S$0.91/unit, boosted by an upward revaluation of Lippo Plaza in Shanghai.

Overall portfolio occupancy improved to 96.8% at end-4Q, with a higher take-up across all of its properties.
In terms of demand, there was greater appetite from the energy, commodities, maritime and logistics sectors, which made up a higher 9.8% of gross rental income at end-4Q vs. 8.5% in 3Q.

OUE Bayfront retained high occupancy of 98.2% in 4Q. Although average passing rent trickled down slightly to S$11.43psf/mth at end-FY17, the downward momentum in negative rental reversion has slowed, thanks to improved demand.
Meanwhile, at One Raffles Place, office occupancy remains high at 96.5% with an average passing rent of S$9.92psf/mth.
Retail revenue made up a larger 15.7% share of gross revenue (14% in 3Q) on a slight q-o-q improvement in retail occupancy to 86.4%.

Lippo Plaza continues to do well with average passing rent at Rmb9.79psm/day at end- 2017, on full occupancy. The property has 28.7% of its income expiring in FY18 and a further 29.2% in FY19.
We believe the property should continue to perform well, underpinned by robust demand.

OUECT’s aggregate leverage stands at 37.3% at end-4Q but is expected to rise to c.40.3% with the redemption of S$100m of CPPUs in Jan 2018. The trust has a remaining S$375m of CPPUs outstanding following this latest exercise.
Funding cost remained stable at 3.5%, with 84.3% of its borrowings on fixed rate debt.

We lower our FY18-19 DPU by 2.1-2.6% to factor in the additional debt taken to redeem the S$100m CPPUs as well as adjusting our estimates post results. However, we raise our DDM-based Target Price to S$0.75 as we roll our assumptions forward, as well as adjust our cost of equity assumption to 7.93% (vs. 8.6% previously).
We maintain a HOLD rating on the stock.
Upside risk to our call would be a faster-than-projected office rental market recovery, while downside risks include a slow take-up of office space.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-01-31

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.75 Up 0.680