OUE Commercial REIT - CGS-CIMB Research 2019-05-10: Tracking Rising Office Rental Cycle


OUE Commercial REIT - Tracking Rising Office Rental Cycle

  • OUE COMMERCIAL REIT (SGX:TS0U)'s 1Q19 DPU of 0.90 Scts in line, at 26.2% of our FY19 forecast.
  • Benefiting from rising office rental cycle.
  • Maintain HOLD with unchanged Target Price of S$0.57.

OUECT 1Q19 results highlights

  • OUE COMMERCIAL REIT (SGX:TS0U) reported 25.5%/23.5% y-o-y increase in 1Q19 revenue/NPI, with the inclusion of contributions from OUE Downtown office as well as organic expansion within its existing portfolio.
  • Although portfolio occupancy dipped slightly q-o-q to 94%, this was offset by positive rental reversions.
  • OUE Commercial REIT's 1Q19 DPU of 0.9 Scts is 47.5% higher y-o-y, on a rights adjusted basis. The 1Q19 results were in line with our expectations, with DPU at 26.2% of our FY19 forecast.

Improving passing rents for all its assets

  • OUE Commercial REIT continue to achieve positive rental reversion across its portfolio in 1Q19.
  • OUE Bayfront (OUEB) saw its average passing rent ticking up q-o-q to S$11.65psf with lease expiries committed at S$13.00-14.30psf. Average passing rent for One Raffles Place (ORP) also improved to S$9.50psf from S$9.45psf a quarter ago. OUE Downtown office also enjoyed slightly higher average passing rent of S$7psf.
  • While Lippo Plaza’s occupancy slipped 2.5% pts q-o-q to 87.6%, its average passing rent grew q-o-q to Rmb9.97psm/day.

Rising office cycle to underpin positive rent reversions for expiries

  • OUE Commercial REIT has a remaining 14.9% and 25.9% of gross rental income to be renewed in FY19 and FY20, respectively, largely coming from ORP and OUE Downtown office. This will enable the trust to leverage on the still rising office rental cycle.

Stable debt cost

  • Debt cost remained stable q-o-q at 3.5% in 1Q19 and the REIT has minimal refinancing needs for FY19 and FY20. OUE Commercial REIT and OUE Hospitality Trust (SGX:SK7) recently announced a proposed merger via a scheme of arrangement, with OUE Hospitality Trust becoming a sub-trust of OUE Commercial REIT when completed.
  • While the deal to be DPU accretive to both trusts, proforma estimates showed that OUE Commercial REIT’s book NAV could be diluted to S$0.62/unit.
  • We expect the deal to have a more transformative impact on OUE Commercial REIT in the medium term, where an enlarged size should result in enhanced scale and funding headroom as well as potential inclusion in benchmark indices.

Maintain HOLD

  • We maintain our HOLD rating as we expect OUECT’s share price to remain range-bound in the near term, pending completion of its merger with OUE Hospitality Trust, expected by Aug 2019. We leave our FY19-21F DPUs and Target Price of S$0.57 unchanged.
  • Upside catalysts include a re-rating on the back of index inclusion while downside risk includes slower office rental market.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.570 SAME 0.570