OUE Commercial REIT - CGS-CIMB 2018-05-10: Stable Quarter

OUE COMMERCIAL REIT SGX: TS0U

OUE Commercial REIT (OUECT) - Stable Quarter

OUE Commercial REIT’s 1Q18 DPU of 1.12 Scts in line with expectations, at 25% of our FY18F forecast.
Slight q-o-q improvement in portfolio committed occupancy.
Narrowing rental reversion gap due to rising office spot rents. Maintain HOLD with an unchanged Target Price of S$0.75.

OUE Commercial REIT (OUECT) saw a 1.6% y-o-y decline but 0.2% q-o-q improvement in 1Q18 gross revenue to S$44m. Distribution income grew 4.7% y-o-y to S$17.4m, due to a slight improvement in committed portfolio occupancy to 96.9%, higher NPI margin of 80% (from utilities cost savings), lower finance costs and lesser distribution leakage to CPPU holders.
The DPU f 1.12 Scts is 9% below that achieved in the previous period due to an enlarged units base following a private placement exercise conducted earlier.

One Raffles Place (ORP) saw a 0.6% pt rise in committed occupancy to 97.1%. Although average passing rent slipped to $9.75psf/mth, the downward momentum has decelerated with new/renewal rents ranging between S$9.70-11.00psf, close to expiring rents of S$10.47psf.
The trust is planning to enhance ORP shopping mall, from mid-2018, to improve circulation and create a more inviting retail area. It has secured Spaces co-working provider, which will occupy more than 35,000sqft of space, from early 2019.

OUE Bayfront (OUEB)’s occupancy remained stable q-o-q at 98.2%. Average passing remained relatively unchanged q-o-q at S$11.42psf/mth at end 1Q. New/renewal leases were contracted at between S$11.30-13.90psf compared to the average expiring level of S$13.26psf, as the broader office leasing market improves.
Looking ahead, OUECT has a balance of 15% of income expiring for the remainder of 2018, of which 5.6% are at OUEB. This should enable the trust to leverage on the rising cycle.

Lippo Plaza (LP) has continued to perform well with average passing rent at Rmb9.85psm/ day. The property has 24.3% of NLA expiring in FY18 and a further 36.5% in FY19.
We believe the property should do well, underpinned by robust demand, despite rising supply in the Shanghai market.

OUECT’s gearing stands at 40.3% at end-1Q18 with S$469m of debt maturing in 2H18. The trust is in advanced negotiations to refinance the loans ahead of maturity.
An estimated 73.7% of debt are on a fixed rate basis, thus hedging against earnings erosion from interest rate hikes.

We leave our DPU estimates unchanged and maintain our HOLD rating with an unchanged DDM-based Target Price of S$0.75.
Upside risk to our call would be a faster-than-expected office rental market recovery, while downside risk includes slow take-up of office space.

LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-10

SGX Stock Analyst Report HOLD Maintain HOLD 0.750 Same 0.750