OUE Commercial REIT - OCBC Investment 2018-05-11: Negative Reversions Still; Waiting For Recovery

OUE Commercial REIT - OCBC Investment 2018-05-11: Negative Reversions Still; Waiting For Recovery OUE COMMERCIAL REIT SGX: TS0U

OUE Commercial REIT - Negative Reversions Still; Waiting For Recovery

  • OUE Commercial REIT’s 1Q18 DPU down 1.6%.
  • Spaces to take up space.
  • Fair Value of S$0.68.

In-line scorecard

  • OUE Commercial REIT’s (OUECT) results were within our expectations. 
  • Revenue in 1Q18 dropped 1.6% y-o-y to S$44.1m, forming 24.5% of our full-year estimate. We believe this stems from continued (but narrowing) negative rental reversions. 
  • NPI increased 1.8% y-o-y to S$35.3m on the back of lower utilities and maintenance costs. We note that higher ‘other income’ increased by S$0.3m in 1Q18 over 1Q17 owing to higher income support drawn upon in relation to OUE Bayfront. 
  • The amount available for distribution grew 4.7% y-o-y to S$17.4m, but DPU fell 8.9% y-o-y to 1.12 S-cents (23.8% of our full-year estimate), due to an enlarged unit base from the private placement completed in March 2017. 
  • At a portfolio level, OUECT saw committed occupancy of 96.9%, which represented a 1.1 ppt y-o-y and 0.1 ppt q-o-q increase.

Transitions at One Raffles Place Shopping Mall

  • As previously announced, a co-working operator (Spaces) will be occupying more than 35k sqft at the One Raffles Place Shopping Mall in early-2019. We believe that part of their requirements will be met by the space vacated by the mall’s current anchor tenant that is occupying ~22k sqft of space.
  • While the overall increase in demand for space at the mall is a positive, we believe that there could be a transitional period of approximately half a year, which we incorporate into our model. 
  • Asset enhancement works are also scheduled to start in mid-2018, which should allow the mall to be able to drive stronger footfall and possibly command better rents.

Staying watchful

  • While narrowing negative reversions still remains our base case, we prefer to wait for more demonstrable evidence of this, especially as ~13.5% of One Raffles Place’s office gross rental income expires in 2H 2018. 
  • Together with the above transitory movements, we reduce our fair value estimate marginally from S$0.69 to S$0.68. Based on the closing price for 10 May 2018, OUECT trades at a FY18F yield of 6.2%, which is ~2 S.D. below its 3-year historical mean.
  • (Maintain HOLD)

Joseph Ng OCBC Investment | https://www.iocbc.com/ 2018-05-11
SGX Stock Analyst Report HOLD Maintain HOLD 0.680 Same 0.680