Analysis: OUE Commercial REIT languishes near 52-week low despite office recovery

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Rent rates for Singapore offices are finally showing signs of recovery.

In tandem with these expectations, REITs with significant exposure to Singapore offices have largely bounced back from their 52-week lows.

Amid this recovery, OUE Commercial REIT is trading at a discount of approximately 25% to net asset value (NAV) per unit, as per the table compiled below shown in comparison with its peers.

The following is a short analysis of factors that investors may need to be aware of, given the seemingly enticing opportunity.


OUE Commercial REIT reported a distribution per unit (DPU) of 1.06 Singapore cents for its 2Q 2018, a fall of 7.8% from what was reported in the corresponding period of 2017.

Correspondingly, the REIT’s revenue and net property income (NPI) declined by 2.6% and 2.4% respectively, while amount available for distribution slid 7.5% to SGD16.5 million.

The REIT has attributed these declines partly to the departure of an anchor retailer, and expects the recovery in the Singapore office market and the presence of a new retail tenants to improve numbers in the quarters ahead.

“In addition, with the acceleration in Singapore office rental growth, we are pleased to report positive rental reversions for leases renewed in 2Q 2018 at OUE Bayfront”, said Tan Shu Lin, CEO of the REIT’s manager.

“With more than 50% of OUE Bayfront’s gross rental income due for renewal over the next two years, we believe the property is well-positioned to benefit from a rising Singapore office market”, she noted.

However, despite these assurances, OUE Commercial REIT remains heavily discounted to NAV.

REIT 2 Jan (SGD) 3 Aug (SGD) YTD (%) Unit NAV (SGD) Discount to NAV
Frasers Commercial Trust 1.50 1.40 -6.67 1.50 6.7%
Keppel REIT 1.26 1.16 -7.94 1.40 17.1%
Suntec REIT 2.17 1.85 -14.75 2.101 11.9%
CapitaLand Commercial Trust 1.98 1.71 -13.64 1.80 5.0%
Starhill Global REIT 0.68 0.67 -1.47 0.91 26.4%
OUE Commercial REIT 0.73 0.69 -5.48 0.92 25.0%

While it may appear as a value play, investors may wish to be aware of the following uncertainties surrounding OUE Commercial REIT.

1. Acquisition prospects

OUE Commercial REIT’s pipeline of potential acquisitions include its sponsor’s 50-storey OUE Downtown 1, and 37-storey OUE Downtown 2, both of which collectively feature about 867,000 square feet of net lettable area on Shenton Way.

The properties commenced operation in 2Q 2017.

However, the REIT’s ability to grow via acquisition will be doubtful for the foreseeable future, given its relatively high gearing of 40.3% and weighted cost of debt of 3.5%.

As such, there are doubts over the REIT's ability to grow inorganically in the years ahead.

2. Loss of income support

An examination of OUE Commercial REIT’s statements of total return for 2Q 2018 reveal ‘other income’ of approximately SGD1.07 million (USD0.78 million) for the period.

This can be linked to income support from the REIT’s sponsor, OUE Limited, and it has increased by approximately 41% year-on-year.

We understand that this income support will cease from 2019 onwards, and will be absent from the REIT’s NPI for then henceforth.

It remains to be seen if OUE Commercial REIT can mitigate against this loss of income support with more favourable rent rates from its office sector.

3. Dilution from convertible securities

OUE Commercial REIT’s statements of total return for 2Q 2018 also reveal that approximately SGD361 million of its assets are represented as convertible perpetual preferred units (CPPUs).

Given past precedences in the Singapore REIT market, holders CPPUs will usually opt to convert their securities into common stocks, especially when markets turn in favour of the latter.

As such, the possibility that OUE Commercial REIT will be further diluted to the tune of SGD360 million worth of units will cast an overhang on its unit price’s performance in the coming quarters.

Conclusion

Clear skies are abound for the Singapore office market but there are fundamental uncertainties surrounding OUE Commercial REIT that may prevent its unit prices from feeling this recovery.

Once there is more direction from the REIT’s manager with regards to acquisition plans, and how it intends to mitigate against the loss of income support, and possible dilution from the conversion of CPPUs, it may be worth ignoring the alluring discount currently present on OUE Commercial REIT.

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