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 (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.

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.

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