OUE Commercial REIT - CGS-CIMB Research 2021-07-30: A Mixed Performance

OUE COMMERCIAL REIT (SGX:TS0U)

OUE Commercial REIT - A Mixed Performance

OUE Commercial REIT's 1H21 DPU of S$0.0123 was below our expectations at 39% of our FY21F forecast.
Hospitality revenue flat at minimum rent, commercial occupancy was stable.
Reiterate HOLD rating on OUE Commercial REIT with a higher DDM-based target price of S$0.45.

OUE Commercial REIT (SGX:TS0U) reported 1H21 gross revenue/NPI of S$133.5m/S$109m, -6%/-3.1% y-o-y, due to the deconsolidation of OUE Bayfront (OUEBF) contributions to a share of JV results, post divestment of a 50% stake in the property, partly mitigated by lower rental rebates and property expenses. However, income available for distribution was up 23.4% y-o-y to S$67.2m (DPU: S$0.0123, +23% y-o-y), thanks to lower average funding cost and absence of retained income, partly offset by a one-off divestment cost of S$7.3m and S$3m income retained for working capital requirements.
Post divestment, the net proceeds were utilised to redeem S$155m of CPPUs in Jun 21 and also to pare down debt. Consequently, OUE Commercial REIT’s gearing level improved to 38% at end-1H21.

OUE Commercial REIT's 1Q21 commercial revenue/NPI dipped 7.8%/4.4% y-o-y to S$99.8m/S$78.5m, mainly due to the deconsolidation of OUEBF, partly offset by lower rent rebates of S$6.2m. Committed portfolio occupancy was stable at 91.7% at end-1H21. Singapore offices saw a mixed reversion of -5.7% to 2.2% given the higher expiry rents.
Mandarin Gallery’s passing rent declined 1.8% q-o-q while occupancy slipped slightly q-o-q to 89.6%. However, leasing at Lippo Plaza improved with committed occupancy rising 5.3% pt q-o-q to 88.5% and rents ticking up to RMB9.21/day.
OUE Commercial REIT has 10.5% and 17.5% of commercial and retail rental income to be renewed in 2HFY21F, mainly from One Raffles Place. Management guided that it still expects to achieve flat-to mid-single digit positive reversions in FY21F.

The hospitality segment reported flat revenue of S$33.8m, supported by the minimum rent under the master lease agreement while NPI grew 0.6% 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 Stay Home Notice and staycation businesses in 2Q21. As a result, Mandarin Orchard Singapore’s (MOS) RevPAR improved significantly q-o-q.
Renovation works at the MOS are on track for completion for the rebranding and relaunch of the hotel as Hilton Singapore Orchard in Jan 2022.
Meanwhile, Crowne Plaza Changi Airport also experienced higher RevPAR q-o-q in 2Q21, due to a low base in 1Q. While we anticipate the hospitality sector recovery to be gradual, the fixed component of its master lease will provide some income stability.

We lower our FY21F DPU forecast for OUE Commercial REIT by 7.8% to take into account the one-off divestment cost and retained income but raise our FY22-23F DPU estimates by 1-2% as we bake in higher occupancy level for Lippo Plaza. At the same time, we also fine-tune our cost of equity from 7.43% to 7.15% to reflect the shift in asset/geography split post divestment of OUEBF. Accordingly, our DDM-based target price for OUE Commercial REIT is raised to S$0.45.
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 2021-07-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.45 UP 0.420