Business as usual for OUE commercial REIT

OUE Bayfront

The following is an excerpt of a research report from CIMB.

  • 2Q/1H18 DPU of 1.06 Scts/2.18 Scts was in line with our estimates, at 24%/49% of our FY18 forecast.
  • Slight dip in committed portfolio occupancy to 95.2%.
  • OUEB and LP enjoyed positive rental reversion on the back of rising spot rents.
  • Maintain Hold with unchanged TP of S$0.75.

2Q18 results highlights

OUECT reported a 2.6% yoy decline in 2Q18 revenue to S$43.1m dragged by lower committed portfolio occupancy of 95.2% and negative rental reversions at One Raffles Place (ORP).

Distributable income fell a greater 7.5% yoy to S$16.5m, further eroded by higher financing costs.

DPU of 1.06 Scts was 7.8% lower yoy on a slight expansion in units base.

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OUEB enjoyed positive rental reversion in 2Q

OUE Bayfront’s (OUEB) committed occupancy slipped slightly to 97.6% in 2Q (from 98.2% in 1Q) while average passing rent remained stable qoq at S$11.42psf/mth.

There were positive rental reversions with new/renewal leases signed at S$11.50-12.80psf compared to the average expiring rent of S$11.71psf, on the back of the continued improvement in the office market.

Looking ahead, there is a further 2.2% of rental income at OUEB to be re-contracted for FY18 and a further 27% and 26.6% in FY19 and FY20.

This should enable the trust to benefit from the rising office rental cycle.

Transitional vacancy impacted ORP performance

One Raffles Place (ORP) reported a slight drop in overall occupancy to 96.6% (vs 97.1% in 1Q) with transitional vacancy from the departure of an anchor tenant at the retail component, offset partially by lower utilities cost.

The trust has secured Spaces co-working provider, which will occupy more then 35,000sqft, from early 2019.

Meanwhile, the office component continued to experience negative rental reversion with new/renewal rents committed at S$9.0-11.0psf compared to average expiring rents of S$10.66psf.

As a result, average passing rent slipped from S$9.75psf in 1Q to S$9.49psf in 2Q.

That said, we anticipate some positive reversionary impact when the 23.4% and 24.9% of rental are renewed in FY19 and FY20 as the expiring leases were signed during the trough of the cycle.

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LP continues to enjoy higher passing rent

Lippo Plaza (LP) has continued to trade well, with positive rental reversion, even as occupancy slipped to 95.1%.

There was robust appetite from the financial and technology sectors, which should continue to underpin occupancy and rental rates.

Stable gearing

OUECT’s gearing stood at 40.3% at end-2Q with average all-in cost of 3.5%.

It is currently in advanced stages of concluding the S$463m of refinancing ahead of maturity.

An estimated 74.1% of its debt are on fixed rates, thus hedging against earnings erosion from interest rate hikes.

Maintain Hold

We leave our FY18-20F DPU estimates unchanged post results and maintain our Hold rating and TP at S$0.75.

Upside risk to our call would be a faster than expected office rental market recovery and a more optimal capital structure while downside risks include a slowdown in office demand.


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