• OUE Commercial REIT's 3Q19 DPU of 0.79 Scts is in line, at 25% of our post-merger FY19F forecast.
• Positive asset performance across the board; outlook remains robust.
• Maintain HOLD with a lower Target Price of S$0.57.

Maiden Post-merger Results

• OUE COMMERCIAL REIT (SGX:TS0U) reported its 3Q19 results, its maiden set of post OUE Hospitality Trust (SGX:SK7) merger results. The transaction was completed on 4 Sep 19. 3Q19 DPU of 0.79 Scts comprises 0.53 Scts of pre-merger clean up DPU and 0.26 Scts of post-merger income.
• 3Q revenue of S$63.3m was 54% higher y-o-y and comprises rental income from commercial properties (88%) and hospitality (12%).
• Distributable income of S$29.5m was 86% higher y-o-y; however, DPU of 0.79 Scts was a smaller 43.6% improvement due to an 88% expansion in unit base.

Commercial Segment Enjoying Positive Reversions

• OUE Commercial REIT's 3Q commercial revenue/NPI of S$55.8m/S$43.2m were 35.5%/33.6% higher y-o-y due to contributions from Mandarin Gallery, OUE Downtown (acquired in Nov 18) and organic growth from positive rental reversion across its Singapore office portfolio. Average passing rents for its Singapore office properties ticked up 0.5-0.8% q-o-q while Mandarin Gallery saw a 1.1% q-o-q uptick in average rents.
• While Lippo Plaza’s committed occupancy improved q-o-q to 92.1%, average passing rent slipped 1.1% q-o-q to Rmb9.75psm/day. OUE Commercial REIT has a remaining 2.3% and 23.9% of commercial rental income to be renewed in 4QFY19F and FY20F, respectively, largely from ORP and OUE Downtown office, thus enabling the trust to leverage on the still-positive reversion cycle.

Hospitality Segment Boosted by Crowne Plaza Changi

• The hospitality segment contributed S47.5m/S$6.85m of revenue/NPI in 3Q, aided by a 3.3% y-o-y revenue per available room (RevPar) growth, mainly from Crowne Plaza Changi Airport (CPCA) due to increased passenger traffic and additional attractions at the Changi Airport. We expect the outlook for the hospitality division to be boosted by the limited new room supply and biennial events in 2020.

Slightly Higher Gearing But Interest Cover Remains Healthy

• Post-merger, OUE Commercial REIT’s gearing rose slightly to 40.5% as at end-3Q19, with interest cover remaining at a stable 3.1x. Average interest cost was at 3.5%, with 73.4% of its borrowings on fixed rates, thus largely mitigating the trust from interest rate fluctuations.
• OUE Commercial REIT has 21% of its debts due to be refinanced in FY20F.

Maintain HOLD

• We adjust our model to factor in the effect of its merger with OUE Hospitality Trust. Also, we now assume that the outstanding S$375m CPPUs are not converted over FY19-21F but remain in perpetuity at 1% coupon.
• Overall, our FY19-21F DPU estimates are lowered by 0.8-8.7% and DDM-based Target Price tweaked down to S$0.57.
• We maintain our HOLD rating as we believe OUE Commercial REIT would likely need to digest the merger exercise and expansion in units base in the near term. Downside risks include slowdown in Singapore office market recovery while upside risk could come from stronger-than-expected asset performance.

Source: CGS-CIMB Research - 14 Nov 2019