Analysts are mixed on OUE REIT TS0U following the REIT’s 3QFY2024 ended Sept 30 update released on Oct 23.
In its update, OUE REIT reported gross revenue of $74.8 million in 3QFY2024, 1.2% lower y-o-y. Net property income (NPI) was down by 3.7% y-o-y at $60.3 million. Excluding the impact of higher property taxes, NPI fell by 1.2% y-o-y. OUE REIT attributes this to the lower contribution from the hospitality segment and upward revision of prior years’ property tax for Hilton Singapore Orchard and Crowne Plaza Changi Airport.
OUE REIT reported positive rental reversion of 10.8% for the quarter. Singapore office occupancy grew to 95.4% to 95.2%. Mandarin Gallery occupancy fell to 95.4% and reversion was 16%. Management expects to enjoy positive rental reversion 4QFY2024 and FY2025 forecasts.
PhillipCapital’s Liu MiaoMiao and Paul Chew have kept their “buy” call with an unchanged target price of 40 cents as they see the REIT’s distribution per unit (DPU) supported by its resilient rental reversion. OUE REIT’s gross revenue for the quarter stood in line with their forecast; the REIT’s 9MFY2024 revenue also formed 74% of their full-year estimates.
OUE REIT’s NPI also stood within their estimates with its 9MFY2024 total forming 73% of their full-year estimate.
The analysts note that the REIT’s hospitality segment generated a lower contribution due to the reduced variable rent as the average daily rate (ADR) normalises from last year’s peak. “OUE REIT will resume paying 50% of [its] base management fees in cash, with the remaining in units which we expect to partially offset the weaker contribution from [its] hospitality segment in FY2024.”
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Even though OUE REIT’s revenue per available room (RevPAR) rose by 0.3% y-o-y to $269 in 3QFY2024, revenue from its hotel segment fell by 1.8% y-o-y due to lower variable rent from the master lease.
“The Singapore market has experienced a softening in average daily rate (ADR) from its peak in 2023 as a trade-off to maintain occupancy rates, driven by the normalisation of tourist spending on accommodation,” write Liu and Chew.
Hilton Singapore Orchard’s RevPAR fell 8.6% y-o-y to $315, while Crowne Plaza Changi Airport's RevPAR saw a 30.3% increase to $259 following its successful asset enhancement in Dec 2023.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
PhillipCapital’s Liu and Chew note that margins deteriorated on the back of lower ADR and higher operating expenses such as manpower and utility costs, and they expect the gross operating margin to remain the same, leading to lower master lease income.
In 2025, the analysts expect the pressure on vacancy rates to reduce in 2025, in light of the delayed construction of Shaw Tower.
“With the postponement of the 614,000 sqft upcoming supply, which is more than 2 times the IOI phase 2 entered into the market this year, we expect rental reversion to maintain at the mid-single digits in FY2025 estimates,” they write.
CGS International analysts Lock Mun Yee and Natalie Ong have kept their call on OUE REIT at “hold” with an unchanged target price of 34 cents as the REIT’s 3QFY2024 revenue and NPI were in line at 25.8% and 25.5% of their FY2024 forecasts respectively.
However, they note that the REIT’s commercial segment performance was “dragged down” by China, as offices in Lippo Plaza Shanghai saw a decrease in occupancy alongside negative reversions.
“The commercial segment reported a 1.1% decline in gross revenue to $47 million in 3QFY2024, dragged down by lower income from Lippo Plaza while NPI rose 0.3% y-o-y to $35.7 million,” say Lock and Ong.
Amid the positive rental reversions in 3QFY2024, the CGSI analysts believe OUE REIT will continue to enjoy positive rental reversion in 4QFY2024 and FY2025, given the average expiring rents of $10.08 and $10.42 per sq ft respectively. This is compared to the Grade A office market rents of $11.95 per sq ft in 3QFY2024, according to CBRE.
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For OUE REIT’s hospitality segment, the REIT manager expects to see “moderate” revenue per available room (RevPAR) growth in the 4QFY2024 given the normalising of tourist expenditure, note the analysts.
Maybank Securities’ analyst Krishna Guha has kept his “buy” call with a lower target price of 34 cents from 36 cents despite seeing a “stable performance” in the 3QFY2024.
In his report, Guha noted “mixed drivers” across the REIT’s segments. Commercial NPI rose by 0.3% y-o-y due to better cost management despite lower revenue; NPI for hotels fell by 8.9% y-o-y while Singapore offices saw occupancy up by 0.2 percentage points q-o-q to 95.4% accompanied by 10.8% rental reversion. Office in the REIT’s Lippo Plaza Shanghai saw weaker occupancy along with negative reversions.
Cost of borrowing
As of Sept 30, OUE REIT reported an aggregate leverage of 39.3%, 0.6 percentage points higher q-o-q. Its total debt rose by 1.45% q-o-q to $2.39 billion, with its fixed rate debt at 70.5%, 9.5 percentage points higher q-o-q. Its interest coverage ratio (ICR) fell slightly to 2.2 times from 2.3 times.
PhillipCapital’s Liu and Chew have identified the downward trajectory of the cost of borrowing as a positive, and they believe that the cost of borrowing is already at its peak and interest rate headwinds will reduce in FY2025. They also note the REIT’s “more conservative” view on interest rate cut expectations with a higher percentage of its debt at fixed rates.
OUE REIT has launched a seven-year investment-grade green note at a historically low rate of 3.9%, achieving 3.2 times oversubscription.
“However, since most of the borrowing has been hedged for at least 1 year, the all-in cost of borrowing could still be much higher than the pre-rate-hike period in FY2025, which may negatively impact the DPU,” Liu and Chew add.
The analysts have lowered their FY2024 to FY2025 DPU forecasts by 2% and 15% respectively, due to weaker contributions from the hospitality segments and consistently high interest rate expenses.
“OUE REIT is currently trading at an FY2024 dividend yield of 6.0% with an attractive valuation of 0.5 times P/NAV,” they write.
Maybank’s Guha has cut his FY2024 to FY2026 DPU estimates by 2.2% to 7.5%, factoring in lower NPI margins. Based on his estimates, the REIT is trading at an “attractive valuation” at a 6.5% yield and a P/B of 0.4 times.
CGS International’s Lock and Ong have kept their FY2024 to FY2026 DPUs unchanged.
