SINGAPORE (Nov 19): OUE Commercial Trust (OUECT) seems poised to thrive on its recent merger with OUE Hospitality Trust (OUEHT), which appears to have ticked all the boxes for the REIT.
OUECT’s latest set of financial results for 3Q19 ended September saw it register increases across several key financial metrics.
Total income available for distribution for the quarter surged 85.9% to $29.5 million, translating into a distribution per unit (DPU) of 0.79 cent, or a 43.6% increase from 0.55 cent back in 3Q18. According to the REIT, this came on the back of gains from the merger.
Net income saw a 68.5% y-o-y increase to $30.1 million. While net property income increased 54.8% to $50.1 million due to the inclusion of income from OUE Downtown Office and Mandarin Gallery, OUECT also benefitted from a fair-value adjustment of $16.8 million in relation to the merger.
In its outlook statement, OUECT noted that the operational performance of its property portfolio is expected to be positive for the balance of 2019, and into 2020.
Market watchers are quick to highlight that the merger could bring about opportunities for the REIT to tap on.
For a start, OCBC Investment Research equity research analyst Chu Peng notes how OUECT’s total assets have increased to some $6.8 billion in value following the merger. The REIT’s portfolio now consists of seven properties in both Singapore and Shanghai, spanning three asset classes - office, hospitality and retail.
Chu, in particular, highlights how OUECT’s commercial portfolio boasts a healthy occupancy rate.
“OUE Bayfront, One Raffles Place, OUE Downtown and Lippo Plaza (in Shanghai), and Mandarin Gallery, reported improved committed occupancy of 95.2%,” says Chu in a Monday report.
“All office properties recorded positive rental reversions this quarter as rents for renewed leases were higher than expiring rents,” adds Chu.
Agreeing that the REIT’s commercial segment has allowed it to leverage on the still-positive reversion cycle, CGS-CIMB Research analyst Lock Mun Yee hones in on OUECT’s hospitality sector, which had delivered a 3.3% y-o-y revenue per available room (RevPAR) growth mainly from Crowne Plaza Changi Airport. The growth was mainly due to increased passenger traffic and additional attractions at the Changi Airport.
“We expect the outlook for the hospitality division to be boosted by the limited new room supply and biennial events in 2020,” says Lock.
In addition, Lock notes that although OUECT’s gearing had risen marginally to 40.5% as at end-3Q19, interest cover remained at a stable 3.1 times which largely mitigated the REIT from interest rate fluctuations.
DBS Group Research analyst Rachel Tan says that the brokerage expects gearing to remain at current levels excluding any revaluation gains.
However, while analysts have recognised the positive effects of the merger on OUECT, they are also quick to exercise caution on the near term outlook.
Chu notes that despite the potential positive rental reversions, the near term outlook for office market could continue to be weighed by economic uncertainty.
“Management noted that the cautious sentiment among occupiers in particular of Lippo PLaza which is likely to face headwinds from rising supply with office projects which were previously deferred entering the market in 2020,” says Chu, who expects that a stronger 4Q19 and FY20 for hospitality as a result of benign supply and stronger leisure travel market could provide a buffer for the REIT.
In addition, Lock opines that some time is needed to fully factor in the effect of the merger.
“We believe OUECT would likely need to digest the merger exercise and expansion in units base in the near term,” says Lock.
In particular, OCBC and CGS-CIMB choose to err on the side of caution with regards to the overhang from the potential 18% dilution from the conversion of the convertible perpetual preferred units (CPPUs) as a result of the merger.
As such, both brokerages have maintained their “hold” calls on OUECT, but differ on the target prices. OCBC has a higher target price of 53.5 cents compared to the previous 50 cents, while CGC-CIMB has reduced its target price to 57 cents from the previous 61 cents.
However, DBS chooses to maintain its “buy” call on OUECT with an unchanged target price of 60 cents. Notably, DBS is the only brokerage to have a “buy” call on OUECT.
Tan highlights how OUECT’s Sponsor, OUE Limited, is unlikely to convert the CPPUs into equity.
“It is unclear if OUECT would conduct an equity placement similar to the one done in March 2017 to help fund the redemption of some CPPUs. But even in the worst case of a redemption of the CPPUs from an equity issuance (non-base case), our TP implies a yield of more than 5% which is higher than that of large-cap office REITs,” says Tan.
As at 9.30am, units in OUECT are trading 0.5 cent higher, or 0.9% up, at 54.5 cents. This implies a price-to-earnings (P/E) ratio of 17.9 times and a distribution yield of 6.46% for FY20F according to DBS valuations.
