OUE Commercial REIT - OCBC Investment 2018-02-01: Firmer Rents On The Horizon

OUE Commercial REIT - OCBC Investment 2018-02-01: Firmer Rents On The Horizon OUE COMMERCIAL REIT TS0U.SI

OUE Commercial REIT - Firmer Rents On The Horizon

  • 4Q17 DPU down 3.4%.
  • Some joy for rental reversions.
  • Challenges remain.

In-line set of results 

  • OUE Commercial REIT’s (OUECT) results were generally within expectations. For 4Q17, revenue fell 2.3% y-o-y to S$44.0m on the back of lower rental income, while NPI was down by a smaller order of 0.3% y-o-y to S$34.7m, due to lower property operating expenses. 
  • We note that the amount available for distribution to unitholders grew 14.6% y-o-y to S$17.7m stemming from the absence of performance fees and higher income support being drawn upon at OUE Bayfront. 
  • For the quarter, DPU dropped 3.4% to 1.14 S-cents as a result of an enlarged unit base from the equity placement done in March 2017. 
  • On a FY basis, OUECT’s revenue of S$176.3m and DPU of 4.67 S-cents constituted 98.8% and 100.0% of our FY17 forecasts, respectively.

Expect firmer signing rents 

  • We note that management appears to be relatively upbeat about the possibility of commanding firmer rents moving forward, which is in-line with the general sentiment from the current earnings season amongst most of the Grade A CBD landlords. Nonetheless, slight negative reversions could still be registered in 2018, given that the expiring leases were signed at elevated rates ~3 years back. 
  • On a portfolio basis, OUECT registered a healthy committed occupancy of 96.8% as at 31 Dec 2017, with Lippo Plaza maintaining its 100% committed office occupancy record for the third consecutive quarter.

Not without its challenges 

  • OUE Commercial REIT (OUECT) has redeemed S$100m of convertible perpetual preferred units (CPPUs) on 2 Jan 2018, which on a pro forma basis, would have raised aggregate leverage from 37.3% to 40.3% as at 31 Dec 2017, thereby elevating financing costs. 
  • Separately, in order to backfill the cessation of income support at OUE Bayfront from Jan 2019, a marked increase in signing rents will be required, since committed occupancy is already at 98.2% (as at 31 Dec 2017), and only 8.6% of the asset’s leases (by gross rental income) will expire in 2018. 
  • OUE Commercial REIT is currently trading at a FY18F yield of 6.3%, and this yield compression to ~2 S.D. below its 3 year mean is similar to that of its other listed peers (e.g. Keppel REIT, CapitaLand Commerical Trust). We roll forward our valuations, and our fair value estimate rises from S$0.67 to S$0.69. 
  • (HOLD)

Joseph Ng OCBC Investment | http://www.iocbc.com/ 2018-02-01
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.69 Up 0.670