OUE Commercial REIT - CGS-CIMB Research 2021-02-01: Mixed Performance

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Mixed Performance

OUE Commercial REIT's FY20 DPU of 2.43 cents was slightly below our expectations, at 92.4% of our full-year forecast.
Office segment performed well; hospitality underpinned by master lease arrangements.
Reiterate HOLD with a lower DDM-based target price of S$0.415.

OUE Commercial REIT (SGX:TS0U) reported 2H20 gross revenue/NPI of S$150m/S$119.4m, -0.1%/-1% y-o-y, dragged by rental rebates and other relief measures to retail tenants, partly offset by the inclusion of income from Mandarin Gallery post-merger in Sep 2019.

OUE Commercial REIT's 2H20 DPU of 1.43 cents includes the release of S$5.8m of retained distribution in 1H20. FY20 DPU of 2.43 cents represents a payout ratio of 92.5% as OUE Commercial REIT retained S$11m of capital distribution to partly fund working capital requirements for its hotel segment.

2H20 commercial revenue/ NPI of S$116.2m/ S$89m were 1.3%/2.2% lower y-o-y due to rental rebates extended to tenants. To date, rental rebates committed to commercial tenants amount to S$18.3m in FY20.
OUE Commercial REIT's committed portfolio occupancy stood at 92.5% at end-Dec 2020, stable q-o-q. Singapore offices continued to enjoy positive rental reversions of 5.3-20.1% in 4Q. One Raffles place (ORP) and OUE Downtown’s average passing rents ticked up 0.2-6.5% q-o-q while Mandarin Gallery’s passing rent declined 0.9% q-o-q.
OUE Commercial REIT has 24.5% and 26.8% of commercial rental income to be renewed in FY21-22F. We anticipate office rental reversions to remain positive in FY21F.
Meanwhile, OUE Commercial REIT's hospitality segment reported a 4.5%/2.7% rise in 2H20 revenue/NPI, thanks to the master lease agreements of the hotel properties and a low base in 2H19 with ~3.75 months of hospitality contributions. 4Q20 RevPar was up 8% y-o-y due to higher staycation rates and additional demand from the air crew segment as more flights resume. While we anticipate the hospitality sector recovery to be gradual, the fixed component of its master lease will provide some income stability.

In Jan 2021, OUE Commercial REIT announced the proposed divestment of a 50% stake in OUE Bayfront (OUEBF), OUE Tower and OUE Link to a fund managed by Allianz Real Estate, based on an agreed property value of S$1,267.5m or a 26.1% and 7.3% premium to its 2014 purchase consideration and Dec 2020 valuation, respectively. The divestment will enable OUE Commercial REIT to realise capital appreciation value of its property while maintaining exposure to the Singapore office market at a high 57.8% of portfolio value.
OUE Commercial REIT will realise net divestment proceeds of S$262.6m. Assuming the net proceeds are used to repay debt, its proforma gearing could decline by 6.7% points to 33.6%, in our view.

We lower our OUE Commercial REIT's FY21-22F DPU estimates by 4-12.1% as we adjust our projections to take into account the divestment of its 50% stake in OUE Bayfront properties, absence of capital recycling and a more modest hospitality segment recovery. Accordingly, our DDM-based target price is lowered to S$0.415.
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.
Potential upside risks include redeployment of divestment proceeds into higher yielding assets and faster-than-expected recovery in the hospitality segment.
Downside risks include slower-than-anticipated recovery from COVID-19.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.415 DOWN 0.482