OUE Commercial REIT - CGS-CIMB Research 2018-08-02: Business As Usual

OUE Commercial REIT - CGS-CIMB Research 2018-08-02: Business As Usual OUE COMMERCIAL REIT SGX:TS0U

OUE Commercial REIT - Business As Usual

  • OUE Commercial REIT (OUECT)’s 2Q/1H18 DPU of 1.06 Scts/2.18 Scts was in line with our estimates, at 24%/49% of our FY18 forecast.
  • Slight dip in committed portfolio occupancy to 95.2%.
  • OUE Bayfront and Lippo Plaza enjoyed positive rental reversion on the back of rising spot rents.
  • Maintain HOLD with unchanged Target Price of S$0.75.

2Q18 results highlights

  • OUE Commercial REIT (OUECT) reported a 2.6% y-o-y decline in 2Q18 revenue to S$43.1m dragged by lower committed portfolio occupancy of 95.2% and negative rental reversions at One Raffles Place (ORP). Distributable income fell a greater 7.5% y-o-y to S$16.5m, further eroded by higher financing costs.
  • DPU of 1.06 Scts was 7.8% lower y-o-y on a slight expansion in nits base.

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OUE Bayfront enjoyed positive rental reversion in 2Q

  • OUE Bayfront’s (OUEB) committed occupancy slipped slightly to 97.6% in 2Q (from 98.2% in 1Q) while average passing rent remained stable q-o-q at S$11.42psf/mth. There were positive rental reversions with new/renewal leases signed at S$11.50-12.80psf compared to the average expiring rent of S$11.71psf, on the back of the continued improvement in the office market.
  • Looking ahead, there is a further 2.2% of rental income at OUE Bayfront to be re-contracted for FY18 and a further 27% and 26.6% in FY19 and FY20. This should enable the trust to benefit from the rising office rental cycle.

Transitional vacancy impacted ORP performance

  • One Raffles Place (ORP) reported a slight drop in overall occupancy to 96.6% (vs 97.1% in 1Q) with transitional vacancy from the departure of an anchor tenant at the retail component, offset partially by lower utilities cost. The trust has secured Spaces co- working provider, which will occupy more then 35,000sqft, from early 2019.
  • Meanwhile, the office component continued to experience negative rental reversion with new/renewal rents committed at S$9.0-11.0psf compared to average expiring rents of S$10.66psf. As a result, average passing rent slipped from S$9.75psf in 1Q to S$9.49psf in 2Q. That said, we anticipate some positive reversionary impact when the 23.4% and 24.9% of rental are renewed in FY19 and FY20 as the expiring leases were signed during the trough of the cycle.

Lippo Plaza continues to enjoy higher passing rent

  • Lippo Plaza (LP) has continued to trade well, with positive rental reversion, even as occupancy slipped to 95.1%. There was robust appetite from the financial and technology sectors, which should continue to underpin occupancy and rental rates.

Stable gearing

  • OUE Commercial REIT (OUECT)’s gearing stood at 40.3% at end-2Q with average all-in cost of 3.5%. It is currently in advanced stages of concluding the S$463m of refinancing ahead of maturity. 
  • An estimated 74.1% of its debt are on fixed rates, thus hedging against earnings erosion from interest rate hikes.

Maintain HOLD

  • We leave our FY18-20F DPU estimates unchanged post results and maintain our HOLD rating and Target Price at S$0.75.
  • Upside risk to our call would be a faster than expected office rental market recovery and a more optimal capital structure while downside risks include a slowdown in office demand.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-02
SGX Stock Analyst Report HOLD Maintain HOLD 0.750 Same 0.750