OCBC Investment Research (OIR) has initiated coverage on OUE REIT TS0U with a “buy” call and target price of 34 cents, in a report released on Nov 4.
As of 31 Dec 2023, OUE REIT has total asset under management (AUM) of $6.3 billion, with six properties in Singapore and one in Shanghai. Notably, 93.5% of its portfolio asset value is in Singapore.
OIR analyst Donovan Tan notes that OUE REIT has “high-quality assets with a balanced sector mix.”
OUE REIT has four Grade A office buildings in the Central Business District (CBD), two five-star resorts and a retail mall in Orchard Road.
According to Tan, “the diversified portfolio, with nearly half allocated to office properties and the other half to retail and hospitality, underpins the REIT's ability to enhance income resilience through changing market dynamics.”
While Tan notes that growth in these sectors are moderating in Singapore, he believes that OUE REIT is different due to its ownership of high-quality assets in strategic prime locations.
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Tan is of the opinion that it is this strategic advantage that enables OUE REIT to continue absorbing demand ahead of its competitors in a market that might be challenging.
This would allow OUE REIT to maintain “strong occupancy rates” alongside mild rental growth.
Tan notes that this is reflected by its current operational metrics, with Singapore offices achieving occupancy rates of 94.5%, Mandarin Gallery at 95.3% and hospitality Revenue Per Available Room (RevPAR) at $296 as of 3QFY2024, ended Sep 30.
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Additionally, OUE REIT has rebranded from OUE Commercial REIT at the start of the year, to reflect its focus on all three segments of office, retail and hospitality.
Tan notes that Han Khim Siew, CEO of OUE REIT, improved the REIT’s capital structure, increasing its unsecured debt from 30.9% in 2021 to 87% currently.
Through asset class diversification, quality portfolio and prudent leverage management, OUE REIT has achieved an investment grade (IG) rating of “BBB-” from S&P Global in 2023.
In Sep 2024, OUE REIT issued its annual 7-year IG green note, which was oversubscribed by 3.2 times. Tan notes that 70% of the issuance was allocated to institutional investors at an interest rate of 3.9%.
According to CEO Han, it is rare for non-government linked companies to issue bonds beyond a five-year tenure.
“We believe these developments are significant steps towards restoring equity investors’ confidence and bridging the discount to its net asset value (NAV),” Tan adds.
Tan forecasts distribution yields of 6.7% for FY2024 and 6.9% for FY2025.
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Tan expects finance costs to peak in late FY2025 or 1H2025, resulting in a decrease in distribution per unit (DPU) of 5.7% in FY2024, alongside weaker contributions from Lippo Plaza.
However, Tan expects DPU to increase by around 3% to 5% in the next four years as finance cost decreases.
Tan also expects the REIT to be more operationally stable moving forward, after a significant clean-up of its capital structure and better-optimised asset returns.
Looking ahead, Tan anticipates a “positive rerating” for OUE REIT as the Fed continues its rate cutting path.
Tan derives his target price based on a dividend discount model (DDM) methodology, with a cost equity assumption of 7.94% and a terminal growth rate of 1.5%. The target price represents an implied price-to-book ratio (P/B) of 0.49 times.
At current valuations, Tan states that OUE REIT is trading at a consensus forward 12-month P/B of 0.48 times, approximately 1.1 standard deviations (sd) below its 10-year historical average forward P/B of 0.61 times.
As at 10.39 am, units in OUE REIT are trading flat at 29 cents.
