OUE Commercial REIT - OCBC Investment 2019-11-18: Driving Rental Reversions

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Driving Rental Reversions

OUE COMMERCIAL REIT (OUECT, SGX:TS0U)’s 3QFY19 revenue and net property income rose 53.7% y-o-y and 54.8% y-o-y to S$63.3m and S$50.1m respectively, primarily driven by the contribution from OUE HOSPITALITY TRUST (OUEHT) as well as the inclusion of OUE Downtown Office which was acquired in November 2018. See OUE Commercial REIT Announcements.
Recall that OUECT completed the merger with OUEHT on 4 September 2019. Post-merger, OUECT’s total assets increased to ~S$6.8b with 7 properties in Singapore and Shanghai, across three asset classes: office, hospitality and retail.
An interim DPU of 0.79 S cents was declared which includes the clean-up distribution of 0.53 S cents per unit for the period 1 Jul to 3 Sep before the merger effective date, and the distribution of 0.26 S cents per unit for the period 4 Sep to 30 Sep. YTD Sep 2019, a total of 2.47 S cents were declared. See OUE Commercial REIT Dividend History.

OUECT’s commercial portfolio which consisted of 4 office properties: OUE Bayfront, One Raffles Place, OUE Downtown and Lippo Plaza (in Shanghai), and 1 retail property: Mandarin Gallery, reported improved committed occupancy of 95.2% (+0.3 ppt) as at 30 Sep 2019. All office properties recorded positive rental reversions this quarter as rents for renewed leases were higher than expiring rents. With ~2.3% of OUECT’s commercial portfolio by GRI due for renewal for the rest of 2019, and ~23.9% due in 2020, we expect good rental reversions potential.
For OUECT’s hospitality portfolio, 3QFY19 RevPAR improved 3.3% y-o-y to S$224, largely driven by stronger performance from Crowne Plaza Changi Airport which continued to perform. Crowne Plaza Changi’s RevPAR rose 13.3% y-o-y to S$212 in 3QFY19, on the back of higher ADR and occupancy rate, boosted by the opening of Jewel. Mandarin Orchard Singapore’s performance was relatively stable, with a marginal fall of 0.9% in RevPAR to S$231 this quarter due to soft demand.

Despite the potential positive rental reversions, near term outlook for office market could continue to be weighed by economic uncertainty. Management noted the cautious sentiment among occupiers, in particular of Lippo Plaza which is likely to face headwinds from rising supply with office projects which were previously deferred entering the market in 2020.
However, we expect a stronger 4Q and 2020 for hospitality on the back of benign supply and stronger leisure travel market which could provide a buffer for OUECT.
We incorporated the merger into our model, and subsequently derived a higher fair value estimate of S$0.535 (previously S$0.50). See OUE Commercial REIT Share Price; OUE Commercial REIT Target Price.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-11-18

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.535 UP 0.500