OUE REIT: Improved Outlook, Upgrade to Add, FY25F DPU Yield of 7.3%

CGS International

April 28, 2025

OUE REIT: Improved Outlook and Upgrade to Add Rating

OUE REIT’s (OUEREIT SP) outlook has improved, leading to an upgrade to an Add rating, driven by promising office and retail rental reversions expected in FY25F. The company’s 1Q25 revenue and NPI were largely in line with forecasts, and potential interest savings further bolster the positive outlook. The target price is set at S\$0.33, based on a DDM valuation.

1Q25 Performance: Revenue and NPI Analysis

• 1Q25 revenue of S\$66.0m and NPI of S\$53.2m aligned with 23.7% and 23.5% of FY25F forecasts, respectively [[1]].
• Reported 11.9%/12.1% yoy decrease in gross revenue/NPI due to the divestment of Lippo Plaza Shanghai and lower contribution from Hilton Singapore Orchard [[1]].
• Same-store revenue and NPI slipped by 3.9% and 4.1% yoy, respectively [[1]].
• Gearing was higher sequentially at 40.6% in 1Q25, with plans to reduce it to c.37% using proceeds from the Lippo Plaza Shanghai sale [[1]].
• Lower cost of debt at 4.2% in 1Q25 resulted in interest expense savings of approximately S\$3m [[1]].

Interest Savings and Capital Deployment

• Management anticipates further interest expense savings from a lower base rate when its share of OUE Allianz Bayfront borrowing (S\$311m) is refinanced in 2H25F [[1]].
• FY25-27F DPU estimates raised by 3.8-4.5% to account for interest savings, partially offset by lower revenue forecasts for the Singapore hospitality segment [[1]].
• Management is considering deploying capital to office assets in Sydney or hotels in Tokyo [[1]].

Commercial Assets: Underpinning Portfolio Performance

• The commercial segment showed 2.2% yoy growth in both revenue and NPI, reaching S\$42.7m and S\$32.3m, respectively, on a same-store basis [[1]].
• Occupancy improved to 96.3% for the office portfolio [[1]].
• Rental reversion edged up to 9.9% in 1Q25, driven by OUE Downtown and One Raffles Place [[1]].
• OUE REIT renewed 5.0% of 18.6% expiring leases by gross rental income (GRI) in FY25F in 1Q25 [[1]].
• Expectation of single-digit positive reversion as expiring leases are marked to market [[1]].
• Occupancy at Mandarin Gallery inched up to 99.5% [[1]].
• Growing spending on food and beverage was noted, contrasting with shrinking luxury spending by Chinese tourists [[1]].

Hospitality Segment: A Mixed Performance

• Hospitality revenue declined to S\$23.3m (-13.3% yoy), and NPI was S\$20.8m (-12.5%) in 1Q25 [[1]].
• Underperformance at Hilton Orchard was partially offset by growing contribution from Crowne Plaza [[1]].
• RevPAR at Hilton Orchard was S\$249, lower by 19.1% yoy in Mar 25, due to declines in travelers from the US, Indonesia, and China [[1]].
• Crowne Plaza saw 8.9% RevPAR growth (S\$247 in 1Q25), benefiting from its proximity to Jewel Changi and Singapore Changi Airport [[1]].
• RevPAR estimates revised to factor in macroeconomic headwinds on travel demand, lowering FY25-27F revenue forecasts by 3-4% [[1]].

Revised DPU Estimates and Rating Upgrade

• FY25-27F DPU estimates raised by 3.8-4.5%, leading to an upgrade to an Add rating [[1]].
• Attractive FY25F DPU of 7.3% and undemanding valuation (P/BV at 0.47x) [[1]].
• Potential re-rating catalysts include accretive acquisitions [[1]].
• Downside risks include a slowdown in global travel demand and unexpected lease non-renewals [[1]].

Revised Financial Forecasts

The following table summarizes the revisions in financial forecasts:

Dividend Yield and Spread Analysis

• OUE REIT dividend yield of 7.2% in Apr 2025 is close to +1 s.d. from its historical average yield [[2]].
• OUE REIT yield spread of 4.2% in Mar 2025 is slightly above its average yield spread of 4.0% [[2]].

Valuation Metrics: P/BV Ratio

• OUE REIT P/BV ratio of 0.47x in Apr 2025 is below -1 s.d. from its historical P/BV ratio [[3]].

ESG Performance and Initiatives

• OUE REIT scored a C in its ESG combined score by LSEG (formerly Refinitiv) in FY23 [[4]].
• Environmental pillar rated B-, Social pillar at C+, and Governance pillar ranked D [[4]].
• ESG controversies scored at A+ [[4]].
• Refreshed ESG targets include reducing absolute GHG emissions by 40% by FY30 (from the base year of FY17) [[4]].
• Plans to reduce water intensity by 25% for commercial assets and lower non-hazardous waste by 15%, both from base year FY17 [[4]].
• Aims to reduce energy and water intensity per occupied room by 25% by FY30 in the hospitality segment [[4]].
• Targets increased female representation on its Board of Directors and in senior management roles, at 25% and 40%, respectively [[4]].
• Actively pursuing opportunities in renewable energy use and aims for green financing to account for 90% of its financing obligations by FY30 [[4]].
• Obtained a 3-star GRESB Real Estate Benchmark rating in 2023 [[4]].

ESG Concerns and Opportunities

• Rated low for community (C+) and CSR strategies (C-) [[4]].
• Current valuations do not ascribe a premium/discount to its Social pillar ratings [[4]].
• Improvement in its Governance pillar would boost its overall ESG score [[4]].

ESG Achievements and Trends

• In FY23, LSEG ranked OUE REIT 39th out of 104 companies in Singapore and 6th out of 13 real estate companies/REITs in Singapore [[4]].
• 95.7% of OUE REIT’s portfolio was green certified, and 50.3% of its leases are green leases at end-2023 [[4]].
• Energy intensity was reduced by 20.9% (vs. base year FY17) for the commercial segment, while hospitality saw an increase of 17.8% in energy intensity over the same period [[4]].
• Water intensity was lowered by 26.1% and 16.9% for the commercial and hospitality segments in FY23 [[4]].
• Approximately 69.5% of its total borrowings were sustainability-linked loans [[4]].
• ESG score shines in resource use (A-), workforce (A-), environmental innovation (A+), product responsibility (A+), and emissions (B+) segments [[4]].

Key Financial Metrics and Ratios

The following table summarizes key financial metrics and ratios: