SINGAPORE (May 8): DBS is maintaining its “hold” call on OUE Commercial REIT (OUE CT) with a revised target price of 67 cents given likely operational weakness ahead of new office supply in 2017, dilution from the recent equity placement, and uncertainty over the timing of any acquisition.
“While we see long-term value in OUECT as it trades at about 20% discount to its book value,” says analyst Mervin Song.
OUE will be renewing close to 20% of its income in 2017, where market rents are still expected to slide given the excess supply situation.
DBS notes that there are 12.7% of leases by gross income at OUE Bayfront and 26% at One Raffles Place (ORP) that are up for renewal in FY17.
The risk of negative rental reversions arises as rents for these leases were signed during the better times in FY14/15, most likely at a higher base than current market rates.
However, DBS notes that the untapped portion of income support at OUE Bayfront allows the manager to be more discerning in choosing the right tenant mix till it expires at the end of 2018.
“Therefore, downside from OUE Bayfront is limited,” says Song.
OUE CT recently conducted an equity placement, raising $150 million. However, it has yet to deploy the proceeds for any acquisition, but has paid down its debt.
Potential acquisitions would provide upside risk to DBS’s DPU estimates and target price.
“The key risk to our view is a greater-than-expected fall in spot Grade A office rents to below $7 per square foot per month,” says Song.
Units of OUE CT are trading at 70 cents.
