OUE Commercial REIT - DBS Research 2020-01-31: A Good Start Post-merger

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - A Good Start Post-merger

OUE Commercial REIT's 4Q19 DPU +12% y-o-y to 0.84 Scts, its maiden full quarter post-merger.
Stable commercial portfolio, continues to enjoy strong positive rental reversions while committed rents inched higher.
Hotel RevPAR +1.9% y-o-y led by Crowne Plaza which surpassed minimum rent in FY19.

OUE Commercial REIT (SGX:TS0U)’s 4Q19 DPU +12% y-o-y to 0.84 Scts, its maiden full quarter post-merger.
FY2019 DPU -4.9% y-o-y to 3.31 Scts, above our estimates.
4Q19 revenue and NPI +81% and +93% respectively to S$87m and S$71m post-merger effective from 4 Sept 2019.
On a like-for-like basis, 4Q19 revenue grew from both the office portfolio (ex-OUE Downtown Office) and OUEHT’s portfolio (compared to OUEHT’s 4Q18 performance).
Revenue growth in the office portfolio were largely contributed by One Raffles Place (ORP) on higher rental rates while OUEHT’s portfolio were largely from Crowne Plaza Changi Airport on higher room rates and occupancy.
Gearing was relatively stable at 40.3% while average cost of debt fell marginally to 3.4% vs 3.5% in 3Q19.
As at Dec-19, OUE Commercial REIT’s asset valuation grew marginally by 0.7% mainly on higher valuation for ORP offset by cap rate expansion for OUE Downtown Office due to its short land lease tenure.

Overall commercial portfolio occupancy (incl Mandarin Gallery) was stable q-o-q at 95% except Lippo Plaza which saw occupancy dropping marginally by 0.9 ppts to 89.9%.
Singapore commercial properties continue to enjoy strong positive rental reversions of between 9.4% to 26.5% in 4Q19.
During the quarter, signing rents were above average expired rents for all 3 Singapore office properties with average committed rents increasing by c.4% q-o-q except OUE Downtown which fell 8% q-o-q.
After a commendable improvement in 3Q19, Lippo Plaza’s occupancy slipped marginally to just below 90% and average passing rents moderated slightly by 1% q-o-q. However, management believes Lippo Plaza has stayed resilient despite a challenging Shanghai office market that is facing high vacancy and upcoming supply. Management continues to focus on tenant retention and to maintain a high occupancy rate at Lippo Plaza.
Mandarin Gallery’s performance remains stable with occupancy at 98.3% as at Dec-19 and average passing rent at S$21.95psf / per month.

OUE Commercial REIT’s hotel portfolio recorded 1.9% y-o-y growth in 4Q19 RevPAR, mainly from Crowne Plaza Changi Airport
Crown Plaza’s 4Q19 RevPAR +9.9% y-o-y to S$198 driven by higher room rates and demand from corporate and wholesale segment. In FY19, Crown Plaza surpassed its minimum rent of S$22.5m in FY19 for the first time.
Mandarin Orchard Singapore’s 4Q19 RevPAR fell 1.3% y-o-y to S$226 as it continued to face downward pressure in the trading environment and partially impacted by a new reopened hotel in the past year.

Despite slowing growth in office spot rents, management believes its Singapore office assets will continue to enjoy strong positive rental reversions between high single digit to mid-teens in FY2020 given the low expiring rents.
Following the outbreak of the coronavirus, management has received a cancellation from a group tour from China post CNY. While the situation remains fluid, the impact from current cancellations is still minimal.
Management communicated that the exposure of its hotels to Chinese tourists is c.10% and will continue to monitor the situation closely.
Post the merger, OUE Commercial REIT can now work towards potential inclusion into the EPRA NAREIT Index. However, management said that they are probably short of an acquisition to bring them towards index inclusion.
Management prefers CBD offices and hotels in overseas market such as Europe, UK, Australia, and Japan. Management stated they will remain disciplined in sourcing for DPU accretive deals.

We maintain our BUY rating on OUE Commercial REIT with a target price of S$0.60.
See OUE Commercial REIT Share Price; OUE Commercial REIT Target Price; OUE Commercial REIT Analyst Reports; OUE Commercial REIT Dividend History; OUE Commercial REIT Announcements; OUE Commercial REIT Latest News.
We trimmed our FY20F/FY21F estimates marginally to factor in the muted RevPAR from Mandarin Orchard Singapore.
Currently trading at 6.3% to 6.5% yield for FY20F and FY21F, OUE Commercial REIT offers an attractive value proposition vs its peers which are trading at c.4% yield on average. Moreover, as a larger entity now, Singapore-centric with strong underlying performance, and working towards potential inclusion into the EPRA NAREIT Index, we believe OUE Commercial REIT will draw investor interest.
In addition, OUE Commercial REIT’s commercial portfolio continues to show strong performance with strong positive rental reversions to drive near-term growth. Its new hospitality portfolio is an added boost to ride on the recent upturn in Singapore hospitality sector.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-01-31

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