• 1Q16 results within expectations
• Portfolio occupancy improved to 94.8%
• Maintain HOLD

1Q16 numbers were within expectations

OUE Commercial REIT report that its 1Q16 amount available for distribution and distribution per unit increased 35.1% and 33.3% YoY to S$17.0m and 1.32 S-cents per share, respectively, mostly due to contributions from One Raffles Place (which was acquired in Oct 2015), a stronger performance from OUE Bayfront and lower maintenance costs at Lippo Plaza, partially offset by higher property operating expenses and property taxes.

We note that finance costs over the quarter also rose QoQ from S$4.7m to S$13.8m given a higher amount of loans outstanding. In terms of the topline, 1Q16 gross revenues similarly increased YoY from S$20.4m in 1Q15 to S$42.9 given the impact from One Raffles Place and OUE Bayfront. We judge these results to be broadly within expectations and 1Q16 distribution now constitutes 26.7% of our full year forecast.

Active lease management at portfolio assets

OUECT’s overall portfolio occupancy improved from 94.3% as at end 4Q15 to 94.8% at the latest quarter, while we continue to see positive rental reversion of 4.9%, 3.0% and 5.3% at OUE Bayfront, One Raffles Place and Lippo Plaza, respectively.

In anticipation of the significant office supply in 2H16, OUECT’s management has been actively managing the lease expiry profile of its portfolio. At at end 1Q16, 9.1% of the trust’s gross rental income is due to renewal in 2016 (down from 15.1% at the start of the year); we highlight all expiring leases in 2016 for OUE Bayfront has been renewed and more than 60% of the the asset’s gross rental income is up for renewal only in 2019 and beyond.

The trust’s aggregate gearing stands at 40.5% as at end 1Q16 and, in light of the volatile interest rate environment, the manager has increased the proportion of its fixed rate borrowings from 63.8% as at 4Q15 to 79.2% as at 1Q16. Maintain HOLD on OUECT with an unchanged fair value estimate of S$0.65.

Source: OCBC Research - 11 May 2016