Press Release

Presentations

Financials

Building operational traction

• Results ahead of IPO forecasts
  
• Broadly in line with our expectations
  
• Continued positive rental reversions
  

4Q14 results within expectations

OUE Commercial REIT’s 4Q14 distributable income and DPU came in at S$12.6m and 1.44 S-cent, respectively, which is 5.5% and 5.1% higher than forecasted in its IPO Prospectus. We judge these results to be within our expectations as FY14 (27 Jan 2014 to 31 Dec 2014) NPI of S$53.8m and distribution income of S$45.9m constitute 100.6% and 97.7% of our forecasts, respectively. In terms of the topline, FY14 gross revenue of S$71.5m was 3.6% ahead of the IPO forecast but was marginally below our expectations (only 96.7% of our forecast) due to a weaker than anticipated contribution from Lippo Plaza. This was negated through effective cost controls by the REIT manager which brought the NPI line back within expectations. The trust pays its distributions on a semi-annual basis, and the book closure for its 2H14 distribution of 2.84 S-cents per unit will be on 3 Feb 2015.

Manager expects positive rental

reversion to continue Overall portfolio occupancy was firm at 98.0% as at end Dec-14, up QoQ versus 97.2% as at end Sep-14. 19.8% of the portfolio, by gross rental income, is up for renewal in 2015 and management expects overall occupancy rates to stay in the healthy mid-90% range over the year ahead. OUE Bayfront remained 100% occupied as at end 4Q14, with average passing rents increasing from S$10.40 psf at IPO to S$10.58 psf. Newly committed rents over FY14 for OUE Bayfront ranged from S$11.22 to S$15.50 psf which is, on average, 14.9% higher than preceding rentals. Lippo Plaza’s occupancy rate increased QoQ to 96.0% as at end Dec-14 from 94.4% as at end Sep-14, and renewal rents in FY14 also showed a respectable 6.0% increase versus preceding rents. Looking ahead, management expects positive rental reversion at Lippo Plaza to continue at a 3.0%-5.0% rate. Maintain BUY with an unchanged fair value estimate of S$0.88.

A firm set of 2Q14 results

• 2Q14 numbers ahead of IPO forecast
  
  
• Positive rental reversions
  
• Maintain BUY at S$0.88 FV
  

2Q14 numbers looking firm

2Q14 distributable income and DPU came in at S$12.5m and 1.43 S-cent, respectively, which is 5.5% and 5.1% higher than forecasted in its IPO Prospectus and in line with our expectations. 2Q14 gross revenues were S$18.7m, marginally lower (-0.3%) versus the forecast, while NPI of S$14.3m is 4.6% ahead of the forecast. The trust pays its distributions on a semi-annual basis, and the book closure for its first distribution of 2.43 S-cents per unit will be on 7 Aug-14.

Positive rental reversions seen at both assets

Overall portfolio occupancy remained fairly healthy at 96.8% as at end Jun-14, and management indicates that only 2.9% of the portfolio, by gross rental income, is up for renewal over 2H14. OUE Bayfront remains 100% occupied as at 2Q14, with average passing rents for the office component increasing to S$10.66 psf from S$10.61 psf last quarter. Management reports that newly committed rents over the quarter for OUE Bayfront ranged from S$11.50 to S$15.20 psf which is, on average, 6.1% higher than preceding rentals. Lippo Plaza saw its occupancy rate dip QoQ to 92.9% as at end Jun-14 from 95.9% due to some tenants not renewing their leases, though renewal rents in 2Q14 still showed a 4.3% increase versus preceding rents.

Maintain BUY

OUE-CT’s aggregate leverage dipped slightly to 39.5% (versus 40.8% as at end Mar-14) while average cost of debt edged up to 2.59%. Management has indicated that they are focused on executing and stabilizing existing portfolio assets in FY14 and will only expect their first acquisition to come in FY15 and after. We continue to believe that OUE-CT shows attractive relative value versus peers. Despite providing one of largest exposure to the premium office space in Singapore, OUE-CT offers a consensus forward yield of 6.7% – the second highest in its peer group (average: 6.0%). Its price-to-book ratio of 0.77 is also lowest amongst peers. Maintain BUY with an unchanged fair value estimate of S$0.88.

Riding the wave

OUE Commercial REIT’s (OUE CREIT) 2Q14 results were in line with expectations, with 2Q14 DPU accounting for 27% of our full-year forecast. Given that the REIT has room for further growth and its relatively attractive valuations, we maintain our Add rating, with a higher DDM-based (discount rate: 7.6%) target price of S$0.93 as we roll forward our valuation to FY15 earnings.

Stable portfolio

OUE CREIT reported a stable quarter of earnings and achieved positive rental reversion of 6.1% for OUE Bayfront (OUEB) and 4.3% Lippo Plaza (LP), lifting the passing rent at these properties to S$10.66 psf/mth and Rmb9.11 psm/day. During the quarter, occupancy for OUEB remained full while LP registered a slight dip in occupancy to 93.6% as some tenants did not renew their leases. However, management guided that as at July, occupancy at LP has crept back to >94% and it is confident that occupancy will exceed 95% by year end.

Continues riding the rental growth in Singapore

With Singapore’s office market maintaining its rental growth (+3.4% yoy in 2Q14), we expect OUE CREIT to continue riding this upward cycle, particularly with 23.7% (by gross rental income) of its leases due in FY15. In addition, with the recent committed rents at OUEB varying between S$11.50 and S$15.20 psf/mth, we remain confident that a blended gross supported rent of c.S$11.80 psf/mth is achievable before 2018. On the other hand, we expect rental growth in the Puxi area of Shanghai to remain subdued due to the impending office supply. However, with the locality of LP and the fact that leases in this property tend to be popular among tenants that require a smaller floor area, we believe LP will be able to maintain a high occupancy through FY15 as the market digests the new supply.

Maintain Add

The stock is currently trading at 6.4%/6.5% of FY14/15 dividend yield and 0.8x FY14 P/BV vs. its peers’ valuations of 5.7%/6.0% and 0.9x P/BV. In view of this, and its stability and room for growth via positive rental reversions for OUEB, we maintain our Add rating, with a higher TP of S$0.93.

Prime-grade REIT

OUECT is a prime-grade commercial REIT with a large pipeline of prime commercial properties for potential injection by its sponsor, which is known for executing well-placed acquisitions. We believe it is well-placed for both organic and acquisition growth.

We initiate coverage with an Add rating and a target price of S$0.90 based on DDM (discount rate 7.6%). Catalysts are expected from a Singapore office-market recovery.

Prime-grade REIT

OUECT’s initial portfolio is valued at S$1.56bn (S$1.59bn if including income support) and comprises OUE Bayfront (OUEB) in Singapore and the Lippo Plaza Property (LP) in Shanghai, China, with a total GFA of 105,296 sq m. Both are prime-grade office properties, located in central business districts. In our estimation, OUEB, which makes up 69% of its aggregate value and FY14 rental income, is its crown jewel. We believe that office rents have bottomed and OUECT will be well-placed for an office-rental recovery. OUE Limited, its sponsor, will provide ROFR assets, which could potentially add up to 4m sf of GFA of prime-grade commercial properties for the REIT. Its sponsor has a good record of executing well-placed acquisitions. We believe that this is the key differentiator for OUECT.

NPI support

OUECT’s FY14 asset leverage is estimated to be 42.4%, higher than the average of 37.2% for commercial REITs listed in Singapore. We expect positive rental reversions at OUEB and occupancy uplifts at LP, which should lift its underlying NPI by 4-6% p.a. in FY14-15. Meanwhile, income support will be provided by its sponsor for OUEB for five years, implying a blended gross rent of S$11.80 psf/month, in line with the through-the-cycle average for prime Grade-A commercial properties. This implies a 15% or so uplift in five years, which we think is conservative.

Key risks

Risks include: 1) its inability to renew the lease at LP, with 31 years of lease left as at 1 Jul 13; 2) failure to obtain tax transparency for the income support for OUEB; and 3) weakness in tenant demand in Shanghai on rising supply.