• FY15 results broadly in line
• One Raffles Place at 90.1% occupancy
• Challenging outlook for Grade A office

FY15 distributable income above Circular Forecast

OUECT reported a 4Q15 distributable income and DPU of S$17.63m and 1.36 S-cents, which were 21.1% and 20.4% higher than the Circular forecast, respectively, due to better operating performances across the portfolio, lower utilities costs incurred by OUE Bayfront and One Raffles Place, and also lower-than-forecasted finance costs.

In terms of the topline, 4Q15 revenues came in at S$40.3m which was similarly 4.2% higher than the circular forecast. We judge this set of results to be broadly within expectations.

Note that that trust had acquired an interest in One Raffles Place in Oct 2015, which put in its maiden contribution over the latest quarter. Including the newly acquired One Raffles Place, which has an occupancy of 90.1%, OUECT’s overall portfolio occupancy held fairly firm at 94.3% as at end 4Q15.

Anticipating significant office supply in 2H16

The trust also reported positive rental reversions over the quarter; as at end 4Q15, OUE Bayfront and One Raffles Place’s renewal rates increased 19.9% and 11.8% over preceding rents, respectively, while Lippo Plaza’s average office renewal rents rose 9.7% over preceding rents.

In anticipation of the significant office supply in 2H16, OUECT’s management has been actively managing the lease expiry profile of its portfolio. Management reports that it has secured renewals and new leases for more than 25% of portfolio leases due in 2016 and, as a result, about 15.1% of the trust’s gross rental income is due for renewal over FY16.

As at end FY15, the trust has a healthy balance sheet with 40.1% net gearing with 63.8% of its interest rate exposure hedged into fixed rates. OUECT’s fair value in our valuation model adjusts to S$0.65 from S$0.84 previously, mainly due to a higher discount rate reflecting a confluence of headwinds from higher interest rates, a challenging outlook for the Grade A office sector and uncertain macroeconomic conditions in China. Maintain HOLD.

Source: OCBC Research - 28 Jan 2016