OUE Commercial REIT (OUECT) is showing brightening prospects, with its hospitality segment gaining traction in recovery, say analysts.
OUECT announced FY2022 ended December results on Jan 30, with distribution per unit (DPU) for the full year at 2.12 cents, down 18.5% y-o-y. While 2HFY2022 net property income (NPI) was up 8.6% y-o-y to $103.3 million, full-year NPI was down 3.6% y-o-y to $196.9 million.
OUECT’s DPU was dragged by lower income support for OUE Downtown, higher interest expense and smaller distribution of divestment gain from OUE Bayfront, say CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.
That said, 2HFY2022 revenue grew 8% y-o-y, thanks to lower rental rebates, partly offset by higher property expenses, add Lock and Ong. “OUECT benefited from a 2.6% revaluation uplift of its investment properties, mainly from Singapore offices and Hilton Singapore Orchard.”
In a Jan 31 note, Lock and Ong are maintaining “hold” on OUECT with an unchanged target price of 36 cents.
Hospitality recovery gaining traction
See also: OUE C-REIT reports higher net property income but lower DPU for 2HFY2022
OUECT’s portfolio comprises approximately 2.2 million sq ft of prime office and retail space, and 1,643 hotel rooms. It currently owns three office assets in the prime Singapore CBD, two hotels and one retail mall in Singapore; and one office building in Shanghai, China.
OUECT’s commercial segment revenue and NPI rose 10.2% and 14.3% respectively in 2HFY20222 to $91.1 million and $71.4 million.
Committed occupancy for OUECT’s Singapore office portfolio ticked up q-o-q to 95.5% at end-FY2022. It enjoyed positive reversions in the range of 3.2%-8.3% for leases signed in 4Q2022.
See also: Hilton Singapore Orchard reopens 446-room Orchard Wing
“While leasing sentiment reflects a more cautious macro outlook, OUECT indicated that there was demand from new set-ups as well as expansion activities,” say Lock and Ong.
Meanwhile, Mandarin Gallery saw positive reversions of 10.4% in 4Q2022 as shopper traffic and tenant sales improved to 95% and 85% of pre-Covid-19 levels respectively.
2HFY2022 hospitality segment revenue rose 2.6% y-o-y to $34.6 million, with FY2022 revenue exceeding the minimum rent under the hotel master lease agreement due to Hilton Singapore Orchard.
4QFY2022 revenue per available room (RevPAR) grew 18.4% q-o-q to $310, led by strong performance at Hilton Singapore Orchard, buoyed by the recovery in the tourism and MICE sectors, say the CGS-CIMB analysts.
Looking ahead, management remains optimistic on a sustained tourism recovery, supported by a healthy pipeline of MICE events and robust visitor arrivals in Singapore. “We believe that the higher hospitality segment revenue could likely offset the loss of income support from OUE Downtown in FY2023,” write Lock and Ong.
Hospitality recovery is the wild card for OUECT, say DBS Group Research analysis Rachel Tan and Derek Tan.
In a Feb 1 note, the DBS analysts are maintaining “hold” on OUECT with an unchanged target price of 35 cents, just 1 cent below CGS-CIMB.
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“We raised our FY2023 DPU [forecast] marginally by 1% to adjust to the slightly higher amount of remaining capital distributions expected to be paid out in FY2023, while we trimmed our FY2024 DPU by 2%. We continue to keep a watch on key turnaround factors that may drive stronger growth going into FY2023,” says DBS.
To the analysts, key positive catalysts include hospitality recovering stronger and faster than expected to more than offset higher expenses and income drop and the office income growth trend continuing longer than expected.
OUECT’s asset valuation was 2.4% higher y-o-y, despite cap rates staying relatively stable, notes DBS. “Singapore assets, except for Mandarin Gallery, recorded higher valuations despite cap rates remaining stable; also, OUE Bayfront saw some cap rate compression of 12.5 basis points (bps). Lippo Plaza saw its valuation decline by 11.3%, largely impacted by forex (local currency decline was only 1.5%).”
In terms of capital management, OUECT’s aggregate leverage dipped to 38.8% on the back of slightly lower total debt and asset valuation uplift. Its weighted average cost of debt rose to 3.4% at end-FY2022 and management guided that it anticipates funding cost could rise by 50 bps in FY2023, say CGS-CIMB’s Lock and Ong.
An estimated 71.5% of its total debt has been hedged into fixed rates. On the back of higher interest cost, adjusted interest coverage ratio declined to 2.5x.
“In view of the weaker global economic outlook and continued business uncertainties, the manager will continue to calibrate its leasing strategy to adapt to potential shifts in occupier demand to optimise the performance of OUECT’s properties,” says the REIT’s manager in a press release.
As at 9.58am, units in OUECT are 0.5 cents higher, or 1.41% up, at 36 cents.
