OUE Commercial REIT - CGS-CIMB Research 2021-05-05: Higher 1Q Distribution Income

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - Higher 1Q Distribution Income

OUE Commercial REIT's 1Q21 income available for distribution is within our expectations, at 24.7% of our FY21F forecast.
Hospitality revenue flat at minimum rent, commercial revenue down on rebate.
Reiterate HOLD with higher DDM-based target price of S$0.42.

OUE Commercial REIT (SGX:TS0U) reported 1Q21 gross revenue/NPI of S$74.7m/S$61.1m, -3.9%/-1.6% y-o-y, dragged mainly by rental rebates to selected retail tenants. However, income available for distribution was up 2.7% y-o-y to S$37.1m, thanks to lower average funding cost, and in line with our projections at 24.7% of our FY21F forecast.
OUE Commercial REIT’s gearing level improved to 40.4% at end Mar-21.

OUE Commercial REIT's 1Q21 commercial revenue/NPI dipped 5%/3% y-o-y to S$57.8m/S$45.7m, mainly due to S$2.6m of rental rebates extended to selected tenants. Committed portfolio occupancy stood at 91.7% at end-1Q21. Singapore offices continued to enjoy positive rental reversions of 0.8-7.2% in 1Q with positive reversions across its three office properties.
Mandarin Gallery’s passing rent and committed occupancy inched up slightly q-o-q. However, leasing environment at Lippo Plaza remained challenging and committed occupancy slipped 3.3% pt to 83.2%.
OUE Commercial REIT has 19.7% and 27.7% of commercial rental income to be renewed in FY21-22F, mainly from OUE Bayfront. Management guided that it expects to achieve flat to mid-single digit positive reversions in FY21F.

OUE Commercial REIT's hospitality segment reported flat revenue of S$16.9m, supported by the minimum rent under the master lease agreement while NPI grew 3% y-o-y due to lower property expenses. RevPAR slipped q-o-q to S$52.
Take up at Mandarin Orchard Singapore was driven largely by staycation business as major renovation works are under way to re-brand Mandarin Orchard Singapore to Hilton Singapore Orchard. Crowne Plaza Changi Airport also experienced lower RevPAR, with demand coming mainly from the aviation sector.
While we anticipate the hospitality sector recovery to be gradual, the fixed component of its master lease will provide some income stability.

OUE Commercial REIT completed the divestment of a 50% stake in OUE Bayfront (OUEBF), OUE Tower and OUE Link in Mar 2021. It indicated that it will generate a net divestment gain of S$26.3m and realise net divestment proceeds of S$262.6m.
OUE Commercial REIT plans to pay out S$15m of the divestment gains to unitholders. In addition, it intends to utilise part of the divestment proceeds to redeem S$155m of CPPUs to improve its capital structure.
We believe OUE Commercial REIT is likely to benefit from interest cost savings when the latter is completed.

We raise our OUE Commercial REIT's FY21-23F DPU estimates by 1-14.3% to take into account the potential distribution of divestment gains of S$15m and release of S$5m of retained FY20 income in FY21F as well as interest savings from the redemption of the CPPUs from FY21-23F. Accordingly, our DDM-based target price for OUE Commercial REIT is raised to S$0.42.
See
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 2021-05-05

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.420 UP 0.415