OUE Commercial REIT - CGS-CIMB Research 2020-01-30: Strong Singapore Portfolio Performance

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Strong Singapore Portfolio Performance

OUE Commercial REIT's 4Q19 DPU of 0.84 Scts was largely in line at 25.1% of our FY19 forecast.
Office portfolio continues to benefit from positive reversions, while higher room rate and occupancy boosts CPCA performance.
Reiterate HOLD with a slightly lower DDM-based Target Price.

OUE COMMERCIAL REIT (SGX:TS0U) reported an 80.7%/121% y-o-y increase in 4Q19 gross revenue and distributable income, with a full quarter’s contribution from the merger of OUE Commercial REIT and OUE Hospitality Trust, completed on 4 Sep 2019. See OUE Commercial REIT Announcements.
After accounting for S$1.5m of retained income, 4Q DPU came in at 0.84 Scts, +12% y-o-y.
OUE Commercial REIT reported FY19 DPU of 3.31 Scts, -4.9% y-o-y, due to an 88% expansion in unit base as part of the merger exercise. 4Q DPU was in line with our expectations, although FY19 DPU came in ahead of our projection due to lower-than-expected merger expenses. See OUE Commercial REIT Dividend History.

4Q commercial revenue/NPI of S$62m/S$47.8m were 29.1%/30.5% higher y-o-y due to contributions from Mandarin Gallery, OUE Downtown (acquired in Nov 18) and organic growth from positive rental reversion across its Singapore office portfolio. Average passing rents for its Singapore office properties ticked up 0.8-1.1% q-o-q while Mandarin Gallery remained stable.
Lippo Plaza’s committed occupancy slipped q-o-q to 89.9% from 92.1% in 3Q, while average passing rent fell 1% q-o-q to Rmb9.65 psm/day.
OUE Commercial REIT has 23.3% and 29.4% of commercial rental income to be renewed in FY20F and FY21F, respectively, largely from OUE Bayfront, One Raffles Place and OUE Downtown office, thus enabling the trust to leverage the still-positive reversion cycle.

The hospitality segment contributed S$24.8m/S$22.7m of revenue/NPI in 4Q, aided by 9.9% y-o-y revenue per available room (RevPar) growth from Crowne Plaza Changi Airport (CPCA), on the back of higher room rates and increased occupancy. With its exceptional performance, CPCA exceeded its minimum rent of S$22.5m p.a. for FY19.

OUE Commercial REIT’s gearing stands at 40.3% as at end-4Q19, with interest cover improving to 3.3x. Average interest cost was slightly lower at 3.4%, with c.75% of its borrowings on fixed rates, thus largely mitigating the trust from interest rate fluctuations.
OUE Commercial REIT has c.22% of its debts due to be refinanced in FY20F.

We adjust our FY20-21F DPU as we adjust our forward portfolio occupancy and office rental rate growth assumptions as well as factor in income retention for working capital purposes. As a result, our FY20-21F DPUs are lowered by 2.3%. Accordingly, our DDM-based Target Price is tweaked down slightly. See OUE Commercial REIT Target Price.
We reiterate a HOLD rating as we believe OUE Commercial REIT will need to digest the merger exercise and focus on delivering organic earnings growth.
Downside risks include a slowdown in Singapore office market recovery while upside risk e from stronger-than-expected asset performance.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.56 DOWN 0.570