• 4Q17 DPU down 3.4%
• Some joy for rental reversions
• Challenges remain

In-line Set of Results

OUE Commercial REIT’s (OUECT) results were generally within expectations. For 4Q17, revenue fell 2.3% YoY to S$44.0m on the back of lower rental income, while NPI was down by a smaller order of 0.3% YoY to S$34.7m, due to lower property operating expenses. We note that the amount available for distribution to unitholders grew 14.6% YoY to S$17.7m stemming from the absence of performance fees and higher income support being drawn upon at OUE Bayfront.

For the quarter, DPU dropped 3.4% to 1.14 S-cents as a result of an enlarged unit base from the equity placement done in March 2017. On a FY basis, OUECT’s revenue of S$176.3m and DPU of 4.67 S-cents constituted 98.8% and 100.0% of our FY17 forecasts, respectively.

Expect Firmer Signing Rents

We note that management appears to be relatively upbeat about the possibility of commanding firmer rents moving forward, which is in-line with the general sentiment from the current earnings season amongst most of the Grade A CBD landlords. Nonetheless, slight negative reversions could still be registered in 2018, given that the expiring leases were signed at elevated rates ~3 years back. On a portfolio basis, OUECT registered a healthy committed occupancy of 96.8% as at 31 Dec 2017, with Lippo Plaza maintaining its 100% committed office occupancy record for the third consecutive quarter.

Not Without Its Challenges

OUECT has redeemed S$100m of convertible perpetual preferred units (CPPUs) on 2 Jan 2018, which on a pro forma basis, would have raised aggregate leverage from 37.3% to 40.3% as at 31 Dec 2017, thereby elevating financing costs. Separately, in order to backfill the cessation of income support at OUE Bayfront from Jan 2019, a marked increase in signing rents will be required, since committed occupancy is already at 98.2% (as at 31 Dec 2017), and only 8.6% of the asset’s leases (by gross rental income) will expire in 2018.

OUECT is currently trading at a FY18F yield of 6.3%, and this yield compression to ~2 S.D. below its 3 year mean is similar to that of its other listed peers (e.g. KREIT, CCT). We roll forward our valuations, and our fair value estimate rises from S$0.67 to S$0.69.

Source: OCBC Research - 1 Feb 2018