OUE Commercial REIT - DBS Research 2020-06-08: Too Cheap To Ignore

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OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Too Cheap To Ignore

• OUE Commercial REIT's valuation at close to -2SD offers an attractive value proposition as we look forward to recovery.
• Worst is over with the start of phased reopening and progressive relaxation of travelling.
• Portfolio supported by minimum rent support – hospitality and OUE Downtown.
• Maintain BUY; lower Target Price to S$0.50.

OUECT's 1Q20 results led by contribution from merger; office grew while hospitality and retail were impacted by COVID-19:

• OUE Commercial REIT (SGX:TS0U)'s 1Q20 distributable income rose 45% y-o-y to S$37.6m mainly due to contribution from the merger with OUE Hospitality Trust. Similarly, revenue and NPI grew 40.5% y-o-y and 42.5% y-o-y with the contributions from the merger.
• OUE Commercial REIT's 1Q20 DPU (based on 100% payout) fell 22.6% y-o-y to 0.7 Scts. 1Q20 DPU has not been disclosed as OUE Commercial REIT will review 1H20 financial results to determine the distribution for 1H20.
• Office portfolio revenue is estimated to grow by 11% y-o-y mainly from OUE Downtown (+38% y-o-y) offset by Lippo Plaza (-47% y-o-y).
• Hospitality portfolio revenue fell 27% y-o-y while revenue from Mandarin Gallery decreased 4.1% y-o-y. Hospitality revenue in 1Q20 was at minimum rent of S$16.9m.
• OUE Commercial REIT's gearing was stable at 40% while average cost of debt fell marginally to 3.2% from 3.4% in 4Q20.
• Approximately S$596m of borrowings which will be due in 2H20 are expected to be refinanced ahead of maturity with average cost of debt projected to remain stable.

Office and retail occupancy weakened marginally but continue to record strong positive rental reversions with higher average committed rents:

• OUE Commercial REIT's overall commercial portfolio occupancy (including Mandarin Gallery) fell marginally q-o-q to 94% vs 95% as at 4Q19. Office portfolio occupancy fell 0.7ppt q-o-q to 93.9% mainly from Lippo Plaza (-4.1ppts) and ORP (- 1.1ppts).
• Singapore commercial properties continued to enjoy strong positive rental reversions of between 7.9% and 16.7% in 1Q20 and completed 6.2% of leases expiring in FY20, lowering remaining lease expiries to 14%.
• During the quarter, signed rents were above average expired rents for all three Singapore office properties as average committed rents increased by 3% to 9% q-o-q offset by ORP (-4% q-o-q) and Lippo Plaza (-7% q-o-q).
• Occupancy at Mandarin Gallery inched down 0.5ppt q-o-q and average passing rent was stable at S$22.02 psf/mth (+0.3% q-o-q).

Hospitality – 1Q20 RevPAR fell 40% y-o-y impacted by COVID-19 pandemic

• OUE Commercial REIT’s hotel RevPAR fell 40% y-o-y impacted by COVID-19 pandemic which led to travel restrictions.
• Crown Plaza’s 1Q20 RevPAR dropped 24% y-o-y to S$141 supported by Singapore Airshow 2020 which proceeded in Feb 2020, business travellers before tighter travel restrictions were implemented, and bulk booking for Singapore residents on 14-SHN.
• Mandarin Orchard Singapore’s 1Q20 RevPAR fell 48% y-o-y to S$110. Management indicated that the hotel is still profitable.

COVID-19 impact/updates

• OUE Commercial REIT is committed to support its tenants with c.S$18.8m of rental rebates, including S$13.3m of property tax rebates from the government.
• OUE Commercial REIT will pass on all property tax rebates to its tenants, offer full rental waiver for Apr 2020 to eligible retail tenants, and implement other targeted relief measures.
• OUE Commercial REIT will also extend the property tax rebates for the month of May 2020 for its retail tenants.
• OUE Commercial REIT will extend flexible rental payment schemes to eligible retail tenants.
• While the retail and hospitality portfolios have been directly impacted by the COVID-19 pandemic, its Singapore office portfolio has seen disruption in leasing activities leading to longer leasing lead time. Renewals are being prioritised due to the Circuit Breaker.
• Shanghai office continues to face headwinds with slower leasing momentum due to COVID-19 outbreak and upcoming supply.

OUECT - Outlook

• Despite the slowdown in leasing activities in its Singapore office portfolio, OUE Commercial REIT continues to expect positive rental reversions at a mid-to-high single digit.
• Management continues to expect the Deloitte lease that is expiring this year to be renewed with positive rental reversions given the low expiring rents.
• While non-essential capex has been withheld, the capex to rebrand MOS will proceed to position the hotel in time for the next MICE events in 2022.
• Hospitality segment will continue to be supported by its minimum rents during this challenging period.
• 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.

OUECT - Valuation

• Our DCF-based target price of S$0.50 for OUE Commercial REIT is based on a higher beta of 0.95x to factor in a higher figure for its hospitality portfolio.

See also S-REIT sector report: Singapore Office REITs - DBS Research 2020-06-08: Grab It While It Lasts.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-08

SGX Stock Analyst Report BUY MAINTAIN BUY 0.50 DOWN 0.600