OUE Commercial REIT - DBS Research 2019-11-15: A Prosperous Marriage


OUE Commercial REIT - A Prosperous Marriage

  • OUE Commercial REIT's 3Q19 DPU rose 43.6% to 0.79 Scts due to the merger and inclusion of OUE Downtown Office acquired in November 2018.
  • Commercial portfolio enjoying strong positive rental reversions on higher occupancy.
  • Hotel RevPAR up 3.3% y-o-y mainly from Crowne Plaza’s 13.3% y-o-y increase.
  • Maintain BUY; Target Price of S$0.60.

Maintain BUY; Target Price of S$0.60.

  • We maintain our BUY rating on OUE COMMERCIAL REIT (SGX:TS0U), with a Target Price of S$0.60. Currently trading at c.6.6% FY20F yield, OUE Commercial REIT is an attractive value proposition vs its peers which are trading at c.4%-5% yield.
  • Moreover, now being a larger entity, Singapore-centric with strong underlying performance, we believe OUE Commercial REIT will over time, draw investors’ interests.

A prosperous marriage

3Q19 DPU rose 43.6% y-o-y to 0.79 Scts post-merger and inclusion of OUE Downtown Office (in line)

  • OUE Commercial REIT’s 3Q19 headline DPU rose 43.6% y-o-y to 0.79 Scts mainly due to the impact from the merger (enlarged post-merger unit base and contribution). The DPU comprises the clean-up distribution of 0.53 Scts for the period from 1 July – 3 September 2019 (pre-merger) and 0.26 Scts for the period from 3 – 30 September 2019 (post-merger).
  • Similarly, 9M19 headline DPU fell 9.5% y-o-y to 2.47 Scts, in line with our new estimates. See OUE Commercial REIT Announcements.
  • 3Q19 revenue and NPI increased by 54% and 55% respectively to S$63m and S$50m with partial contributions from its hospitality assets post-merger from 3 – 30 September 2019 and inclusion of OUE Downtown Office which was acquired in November 2018.
  • Excluding OUE Hospitality Trust’s portfolio and OUE Downtown Office, 3Q19 revenue would have expanded 5.6% y-o-y on higher rental rates and higher occupancy.
  • Post-merger gearing stood at 40.5% with average cost of debt stable at 3.5%.
  • At ORP, the low end of the range of committed rents of S$6.50 psf/mth was due to the renewal of a sub-optimal unit.
  • Despite the challenging office market in Shanghai due to weaker demand on upcoming supply, OUE Commercial REIT successfully raised the occupancy at Lippo Plaza to 92.1% vs 90.6% in 2Q19 led by both office and retail and renewed leases at decent rents ranging from RMB7.30-11.00 psqm/day vs average expired rent of RMB10.07 psqm/day and market rents of RMB9.56- 10.26 psqm/day.
  • Although average passing rents inched up 0.5% to 1.2% q-o-q following a few quarters of positive rental reversions, the average passing rents are still below committed rents signed in 3Q19, implying that positive rental reversions could continue in the near term if spot rents remain sustainable.
  • Management continues to see strong interests for office space especially at OUE Bayfront and believes that its Singapore office properties will remain resilient despite upcoming expiries.

Hospitality – RevPAR rose 3.3% y-o-y mainly from Crown Plaza’s 13.3% y-o-y increase

  • OUE Commercial REIT’s hotel portfolio recorded 3.3% y-o-y growth in RevPAR mainly from Crowne Plaza Changi Airport.
  • Crown Plaza’s RevPAR grew 13.3% y-o-y and 12.8% q-o-q to S$212, driven by strong occupancies and higher room rates partly due to positive spillover from the opening of Jewel Changi Airport.
  • Mandarin Orchard Singapore remained relatively stable although its RevPAR fell marginally by 0.9% y-o-y to S$231, on the back of softer overall demand, mainly from a lower number of Chinese tourists. However, management saw a pick-up from Japanese tourists which partially supported the hotel’s performance.
  • Management continues to see a positive trend from its hotel portfolio and is hopeful that this will continue to next year.

Commercial occupancy inched up by 0.5ppt q-o-q to 95%; continued to enjoy strong positive rental reversions

  • Overall commercial portfolio occupancy (including Mandarin Gallery) stood at 95.2%. Occupancies for all commercial properties were flat or up except Mandarin Gallery which fell 1.3ppts.
  • Excluding Mandarin Gallery, on a same-store basis, occupancy rose 0.5ppt q-o-q to 95%, mainly from OUE Downtown (+0.6ppt), Lippo Plaza (+1.5ppts) and One Raffles Place (+0.1ppt) while occupancy at OUE Bayfront was stable at 99.4%.
  • Singapore commercial properties continued to enjoy strong positive rental reversions of between 8.1% and 14.1% in 3Q19.
  • During the quarter, signing rents were above average expired rents for ORP and OUE Downtown while the lower end of signing rents at OUE Bayfront of S$12.05 psf/mth was only marginally lower than the average expired rents of S$12.12 psf/mth.

Maintain BUY; Target Price of S$0.60

Where we differ – First and sole BUY call.

  • Consensus has a HOLD call on OUE Commercial REIT, given the overhang from the potential c.18% dilution from the conversion of the convertible perpetual preferred units (CPPUs). See OUE Commercial REIT Analyst Reports. While this is a valid concern as the conversion price for the CPPU is S$0.71, we believe that OUE Commercial REIT’s Sponsor, OUE Limited (SGX:LJ3), is unlikely to convert them into equity as the CPPUs are out of the money.
  • It is unclear if OUE Commercial REIT would conduct an equity placement similar to the one done in March 2017 to help fund the redemption of some CPPUs. But even in the worst case of a redemption of the CPPUs from an equity issuance (non-base case), our Target Price implies a yield of more than 5% which is higher than that of large-cap office REITs.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-11-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.600 SAME 0.600