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.
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.
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.
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.
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.