• In-line quarter
• Positive office reversions in Singapore
• FV of S$0.50

In-line Results

OUE Commercial REIT’s (OUECT) results were broadly within our expectations. 4Q18 revenue rose 9.2% YoY to S$48.0m, while NPI rose 5.6% YoY to S$36.6m. These were mainly due to the consolidation of OUE Downtown Office’s income since Nov’18. Other income jumped from S$1.0m in 4Q17 to S$4.0m in 4Q18 arising from the drawdown of income support in relation to OUE Downtown Office; income support for OUE Bayfront will fall off in Jan’19.

Net finance cost rose by 61.7% YoY to S$14.2m, on the back of higher level of borrowings following the OUE Downtown Office acquisition, as well as unfavourable IRS fair value movement (no DPU impact). All-considered, on a full-year basis, distributable income rose 1.9% to S$71.3m. FY18 DPU fell 3.9% (against restated FY17 DPU to account for the recent rights issuance) to 3.48 S-cents, which forms 102% of our full-year forecast.

Enjoying the Rental Cycle in Singapore

Building on the momentum in the Grade A CBD core office market, OUECT’s Singapore assets all witnessed positive office rental reversions, including OUE Downtown Office. While One Raffles Place’s average passing office rent remained unchanged QoQ at S$9.45 psf/month, we believe that this figure should trend upwards in the coming quarters.

Lippo Plaza saw committed occupancy for its office component trend from 100% in 4Q17 to 93.2% in 4Q18. We understand that the trade war appears to be weighing on commercial sentiment, with tenants also take a wait-and-see approach before committing to renewals. Lippo Plaza will see 33.2% of leases (by gross rental income) come up for expiry in 2019, with the bulk of it in 2Q19 and 3Q19.

Driving Rental Reversions at OUE Downtown

OUE Downtown Office’s average expired rents were at S$7.44 psf/month in 4Q18, while comparable sub-market rents (psf/month) in Shenton Way/Tanjong Pagar were at S$9.30 and S$8.41-S$8.83, according to Colliers and Savills, respectively. Thus, we believe that the key priority for the manager would be to drive positive rental reversions at the asset.

In our view, the occupancy rate at OUE Downtown Office could take a near-term hit in order to achieve such an aim, but the shortfall should be backfilled by the income support from the sponsor. We roll forward our valuations, and our fair value increases from S$0.48 to S$0.50

Source: OCBC Research - 31 Jan 2019