CGS-CIMB Research is keeping its “hold” recommendation on OUE Commercial REIT (OUE C-REIT) with an unchanged target price of 48.2 cents, as there is limited scope for outperformance in the near term with the continued challenging hospitality earnings outlook.
This came following the REIT posting a 40.5% y-o-y drop in its 1H20 DPU to just 1.0 cent from 1.68 cents in 1H19. But distributable income was 12.2% higher y-o-y at $54.5 million.
The manager of the REIT said that the drop in DPU was despite the higher amount distributable to unitholders is $13.8 million of distribution comprising tax-exempt income and capital distribution was retained to preserve financial flexibility in view of uncertainties posed by the Covid-19 situation.
Typically, OUE C-REIT’s distribution policy is to distribute at least 90% of its taxable income on a semi-annual basis, with the actual level of distribution to be determined at the manager’s discretion.
Revenue for the period was 32.4% higher at $142.0 million from $107.2 million a year ago.
See: OUE C-REIT posts 40.5% drop in 1H DPU despite higher distributable income to conserve cash
During the quarter, OUE C-REIT’s hospitality segment contributed $16.9 million in revenue and $15.4 million in NPI in 2Q20. This mainly came from the fixed rent component of its master lease.
However, portfolio RevPar declined 71.7% y-o-y to $55 as at 2Q20, dragged largely by a 79.5% contraction in Mandarin Orchard Singapore (MOS) RevPar, while Crown Plaza Changi Airport saw a 56.2% contraction in RevPar.
In a July 24 report, analysts Lock Mun Yee and Eing Kar Mei say, “Operating conditions remain challenging with the loss of tourist arrivals and slower corporate demand; hence, we anticipate the hospitality contributions to track close to its fixed rent component for FY20.”
Meanwhile, following OUE C-REIT’s merger with OUE Hospitality Trust (OUE HT), overall gearing has increased to 40.1% as at end-2Q20, with average interest cost at a slightly lower 3.1%.
It has a remaining $575 million of debt to be refinanced in 2020, but management indicated that these will be refinanced ahead of maturity, with average debt cost remaining stable.
As at 10.55am, units in OUE C-REIT are trading at 40 cents or 0.67 times FY20 book with a dividend yield of 6.58%.
