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


OUE Commercial REIT - You Can Always Go Downtown

  • In-line quarter.
  • SG office: reasons to cheer.
  • Adjusted Fair Value of S$0.48.

3Q18 within expectations

  • 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).

Singapore office rents marching forward

  • 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.

Inducting office components of OUE Downtown into the portfolio

  • 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