OCBC Investment Research’s Chu Peng has given a “buy” rating and a fair value price of 39 cents for OUE Commercial REIT (OUECT), after its merger with OUE Hospitality Trust.
OUECT’s 3Q2020 revenue and net property income NPI rose 12% and 11.4% y-o-y to $70.9 million and $55.8 million respectively, primarily driven by its merger with OUE Hospitality Trust (OUEHT), but partially offset by rental rebates of $5 million to retail tenants.
Meanwhile, committed occupancy of its commercial portfolio was down 2.9 percentage points y-o-y to 92.3% in 3Q2020.
For the quarter, occupancy in Mandarin Gallery fell 0.5 percentage points q-o-q or 4.3 percentage points y-o-y to 93.9%, although shopper traffic and sales have rebounded to about 80% and 70% of pre-Covid-19 levels, respectively.
According to Chu, leasing momentum in Mandarin Gallery, however, remained weak with no new leases signed in 3Q2020. Management is looking to provide shorter leasers with a higher gross turnover rent (GTO) component to some tenants to help them tide over the difficult period amid Covid-19.
Separately, office occupancy in Singapore recovered 0.8 percentage points q-o-q to 94.5%, with positive rental reversions of 2.9% to 22.1% as leasing activities resumed post Circuit Breaker.
For its hospitality segment, 3Q20 revenue per available room RevPAR declined 60.8% YoY but improved 60.5% q-o-q.
See: Enlarged, diversified portfolio increases OUE Commercial REIT's relevance and visibility
Chu forecasts that while demand from government booking is likely to cease in Dec 2020 or early 2021 for Mandarin Orchard Singapore (MOS), she expects demand from air crew at Crowne Plaza Changi Airport to continue in 2021, and higher rates than government bookings.
Renovation at MOS will commence in early 2021 in phases with the new Hilton Singapore Orchard expected to open in 2022 to capture the recovery in the Singapore hospitality
sector.
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Citing the management, Chu notes that staycation demand only contributes less than 10% of overall business, and is unlikely to go up to more than 15% as staycation remains largely a weekend business.
Chu identifies potential catalysts for the stock include Stronger-than-expected growth in leisure demand for hotels and DPU accretive acquisitions, but warns of risks, such as a weaker rebound in the Singapore hospitality, and a slower-than-expected recovery in portfolio rental reversions.
As at 12.07 pm, shares of OUECT were trading at 36 cents, with a FY2020 dividend yield of 6.7%
