• 2Q18 DPU down 7.8%
• Positive reversions recorded
• FV of S$0.68

In-line Set of 2Q18 Results

OUE Commercial REIT’s (OUECT) results were within our expectations. 2Q18 revenue dropped 2.6% YoY to S$43.1m, while NPI fell 2.4% YoY to S$33.9m. This was unsurprising, due to the transitional vacancy at One Raffles Place, following the departure of an anchor tenant, though this was offset partially by lower utilities cost.

A co-working operator (Spaces) will be taking up more than 35k sqft in early-2019, and will backfill more than the 22k sqft relinquished by the said anchor tenant. Finance costs increased 8.7% YoY to S$12.3m, on the back of higher borrowings consequent to the earlier redemption of S$175m of convertible perpetual preferred units.

Coupled with the higher drawdown of income support from OUE Bayfront, the amount available for distribution in 2Q18 was S$16.5m, representing a YoY decline of 7.5%. Consequently, 2Q18 DPU dropped 7.8% YoY to 1.06 S-cents while 1H18 DPU fell 8.4% YoY to 2.18 S-cents; the latter constituted 48.5% of our full-year forecast.

Positive Rental Reversions at OUE Bayfront

We are encouraged to note that positive rental reversions were registered at OUE Bayfront, buoyed by the general recovery in the Singapore office market rents. On the back of healthy demand, we believe OUE Bayfront should be able to command rents north of S$12 psf/mth for new/renewed leases, higher than the average expired rent of S$11.71 psf/mth (as of 2Q18).

Lippo Plaza in Shanghai registered a notable drop in committed office occupancy, from 99.2% in 1Q18 to 95.1% in 2Q18. We understand that this was largely due to two tenants electing not to renew their leases, with one having expansion requirements that could not be fulfilled at the existing premises.

Over at One Raffles Place, average passing office rents continue to slide, dropping ~2.7 %pts QoQ to S$9.49 psf/mth.

We believe another 1-2 quarters would be required before ascertaining if rents have turned a corner. Taking this into account, we adjust our FY18F top-line forecast downwards by 1.4%, while our fair value estimate remains unchanged at S$0.68.

Source: OCBC Research - 3 Aug 2018