OUE Commercial REIT - CGS-CIMB Research 2020-07-24: Drags On Commercial & Hospitality

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Drags On Commercial & Hospitality

OUE Commercial REIT's 1H20 DPU of 1 Sct is below expectations, at 38% of our FY20F forecast.
Lower commercial contributions were due to rental rebates, while hospitality segment remained flat q-o-q at minimum rent level.
Reiterate HOLD, with a DDM-based Target Price of S$0.48.

OUE Commercial REIT (SGX:TS0U) reported a 23.9%/23.7% y-o-y increase in 2Q20 gross revenue and net property income (NPI), following the merger of OUE Commercial REIT and OUE Hospitality Trust in Sep 2019, partly offset by rental rebates extended to its tenants.
As OUE Commercial REIT pays dividends on a semi-annual basis, 1H20 distribution income improved by a smaller increase of 12.1% y-o-y to S$54.5m, after a retention of S$13.8m in tax-exempt income and capital distribution, translating into a DPU of 1 Sct.

OUE Commercial REIT's 2Q commercial revenue/NPI of S$47.4m/S$35m were 8.6%/14.1% lower y-o-y, despite contributions from Mandarin Gallery post-merger, due to out-of-pocket tenant rental rebates, which was largely extended into 2Q (1H: S$13.8m). There was also a lower committed portfolio occupancy of 91.6% as at end 2Q (-2.7% pts q-o-q), dragged by a weaker take-up of its Singapore office, retail and Shanghai office properties. That said, its Singapore offices continue to enjoy positive rental reversions of 6.8-14.8% in 2Q.
Average passing rents for its Singapore office properties ticked up 0.5-2% q-o-q, while Mandarin Gallery’s passing rent inched up by 2% q-o-q, although occupancy slipped to 94.4% (from 97.8%). Lippo Plaza’s committed occupancy dipped q-o-q to 81.1% at end- 2Q20.
OUE Commercial REIT has a remaining 11.1% and 29.4% of commercial rental income to be renewed in 2HFY20F and FY21F, respectively.

The hospitality segment contributed S$16.9m/S$15.4m of revenue/NPI in 2Q, essentially coming from the fixed rent component of its master lease. Portfolio RevPar declined 71.7% y-o-y to S$55 as at 2Q20, dragged largely by a 79.5% contraction in Mandarin Orchard Singapore (MOS) RevPar, while Crown Plaza Changi Airport saw a 56.2% contraction in RevPar.
Operating conditions remains challenging with the loss of tourist arrivals and slower corporate demand; hence, we anticipate the hospitality contributions to track close to its fixed rent component for FY20F.

OUE Commercial REIT’s gearing stands at 40.1% as at end-2Q20, with average interest cost at a slightly lower 3.1%. It has a remaining S$575m of debt to be refinanced in 2020F. Management indicated that these will be refinanced ahead of maturity, with average debt cost remaining stable.

We leave our FY20-22F DPU unchanged and maintain our DDM-based Target Price at S$0.48. We reiterate our HOLD rating as we see limited scope for outperformance in the near term as the hospitality earnings outlook remains challenging.
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.
Upside risks: faster-than-expected hospitality business recovery.
Downside risk: continued decline in commercial occupancy.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-24

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.48 DOWN 0.540