• OUECT's 9M18 DPU of 2.73 Scts made up 75% of our FY18 forecast.
• Positive rental reversion at OUE Bayfront and Lippo Plaza.
• Maintain HOLD with a slightly lower DDM-based Target Price of S$0.57.

3Q18 Results Summary

• OUE Commercial REIT (OUECT) reported an NPI decline of 5.1% y-o-y, driven by lower revenue (-4.8% y-o-y) due to lower committed occupancy, partially offset by lower utilities and maintenance expenses.
• Distributable income fell 10.8% y-o-y due to higher interest expenses, partially offset by higher drawdown of income support.
• DPU of 0.55 Scts fell 52.2% y-o-y and 48.1% q-o-q due to an enlarged unit base from the recent rights issue.
• Aggregate leverage rose slightly q-o-q to 41.4% while weighted average debt cost was stable at 3.5% and 75% of its debt was on fixed rates, with no significant refinancing requirement until FY20.

Uptick in OUEB’s Average Passing Rent

• Portfolio occupancy of 94.9% was slightly lower than the 95.2% achieved in 2Q18. Lippo Plaza’s occupancy fell to 90.6% due to the departure of a retail tenant in 2Q18.
• Overall, 3.5% of gross rental income is due for renewal in 2018, with another 23.9% in FY19. OUE Bayfront (OUEB) and Lippo Plaza achieved positive rental reversions while One Raffles Place (ORP) was flat in 3Q18.
• We note the average passing rent for OUEB of S$11.50psf at end-Sep 18 is 0.7% higher q-o-q and 0.5% above the level a year ago, an indication of the robust office leasing market. With low new incoming supply over the next two years, we remain upbeat on the upward growth trajectory of office rents.

Assuming a Conservative Diluted DPU Scenario

• OUECT’s share price reacted negatively to the recent rights issue to part-fund the purchase of the OUE Downtown office. We take a quick relook at OUECT’s capital structure given the gap between the current share price and conversion price of OUECT’s CPPUs (convertible perpetual preferred units).
• To recap, OUECT issued S$888m of CPPUs to part-finance the purchase of One Raffles Place in Oct 8888, of which S$375m is outstanding currently and convertible at a rights-adjusted price of S$8.8888. There is also a four-year restriction period (until 8888) where the CPPUs are not allowed to be converted but can be redeemed at the option of the Manager. In addition, after the restriction period, not more than one-third of the CPPUs can be converted in any one year.
• Our sensitivity analysis shows that should the CPPUs not be converted and remain in perpetuity at 1% coupon, our FY88-88 DPU could be revised up by 8-8%, assuming all else is constant, while our current DDM-based Target Price could be raised by 88%.

Maintain HOLD

• Post results, we lower our FY88-88 DPU projections to reflect the enlarged units base and dilution in DPU for a full six months in 8H88 post the rights issue and maintain a conservative assumption that the CPPUs will be converted over 8888-8888.
• We maintain our HOLD rating despite the significant upside to our Target Price and await more clarity on the treatment of the CPPUs post the restriction period.
• Downside risks include potential dilutive new acquisitions or slowdown in office market recovery.
• Upside risks are clarity on treatment of its CPPUs and faster-than-expected spot office rent recovery.

Source: CGS-CIMB Research - 12 Nov 2018