OUE Commercial REIT - OCBC Investment 2018-11-09: You Can Always Go Downtown

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - You Can Always Go Downtown

OUE Commercial REIT’s (OUECT) results were within our expectations. 3Q18 revenue fell 4.8% y-o-y to S$41.2m, while NPI dropped 5.1% y-o-y to S$32.3m. We believe that this was (in part) due to the departure of an anchor tenant at One Raffles Place, though mitigated by lower utilities cost and maintenance expenses.
Net finance costs rose 7.2% y-o-y to S$11.2m on the back of higher borrowings, but were partially offset by higher drawdown of income support as well as lower distribution to convertible perpetual preferred unit holders.
All-considered, distributable income fell 10.8% y-o-y to S$15.9m, comprising 22.9% of our full-year estimate.
DPU came in at 0.55 S-cents (inclusive of recently issued rights units), which was 11.3% lower y-o-y against the 0.62 S-cents in 3Q17 (restated on the same basis).

Improving rental trends across OUECT’s Singapore assets in 3Q18 were in-line with the tightening vacancies and improving rents within the Grade A CBD core. OUE Bayfront maintained its second consecutive quarter of positive rental reversions, while One Raffles Place went from negative reversions in 2Q18 to flat reversions this quarter.
While Lippo Plaza’s committed office occupancy dropped 0.9%pts q-o-q to 94.2%, positive rental reversions were still achieved for 3Q18.

OUECT has completed the acquisition of the office components of OUE Downtown on 1 Nov 2018, for a purchase consideration of S$908.0m. Inclusive of a rental support, the property will come with a NPI yield of 5.0%.
As a recap, the acquisition was funded with debt of S$361.6m and as well as proceeds from a 83-for-100 rights issuance, which raised ~S$587.5m. As at June 2018, passing rents at the property were ~S$7 psf per month.
Given that Grade A Shenton Way/Tanjong Pagar office properties achieved S$9.30 psf per month in 3Q18 (according to Colliers), management is of the opinion that pushing rents towards the handle of S$8 psf per month should not be overly challenging.
We incorporate the transaction into our numbers, and apply the enlarged unit base for distributions made in 2H18, in-line with OUECT’s reporting. Following adjustments, our fair value drops from S$0.68 to S$0.48.

Joseph Ng OCBC Investment Research | https://www.iocbc.com/ 2018-11-09

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.48 DOWN 0.680