CGS International April 28, 2025 OUE REIT: Improved Outlook and Upgrade to Add Rating 1Q25 Performance Overview OUE REIT’s 1Q25 revenue and Net Property Income (NPI) were largely in line with forecasts. Revenue: S\$66.0m (23.7% of FY25F forecast) [[1]] NPI: S\$53.2m (23.5% of FY25F forecast) [[1]] Management is optimistic about office and retail rental reversions for FY25F. [[1]] The report upgrades OUE REIT to an “Add” rating, citing an attractive FY25F Distribution Per Unit (DPU) yield of 7.3% and a Price-to-Book Value (P/BV) ratio of 0.47x. [[1]] A new DDM-based Target Price (TP) of S\$0.33 is set. [[1]] Financial Performance Analysis OUE REIT experienced a decrease in gross revenue and NPI in 1Q25 due to the divestment of Lippo Plaza Shanghai and reduced contribution from Hilton Singapore Orchard. [[1]] Gross Revenue: Decreased by 11.9% year-over-year (yoy) [[1]] NPI: Decreased by 12.1% yoy [[1]] On a same-store basis, revenue and NPI also saw declines. [[1]] Revenue: Slipped by 3.9% yoy [[1]] NPI: Slipped by 4.1% yoy [[1]] Gearing was higher sequentially at 40.6% in 1Q25, with plans to reduce it to approximately 37% using proceeds from the Lippo Plaza Shanghai sale. [[1]] A lower cost of debt at 4.2% in 1Q25 resulted in interest expense savings of around S\$3m. [[1]] Further interest expense savings are anticipated from a lower base rate when OUE Allianz Bayfront borrowing (S\$311m) is refinanced in 2H25F. [[1]] FY25-27F DPU estimates have been raised by 3.8-4.5% to account for interest savings, partially offset by lower revenue forecasts for the Singapore hospitality segment. [[1], [2]] Management is considering deploying capital to office assets in Sydney or hotels in Tokyo. [[2]] Commercial Segment Performance The commercial segment showed growth in 1Q25, with revenue and NPI increasing by 2.2% yoy on a same-store basis. [[2]] Revenue: S\$42.7m [[2]] NPI: S\$32.3m [[2]] Occupancy rates improved to 96.3% for the office portfolio, and rental reversion edged up to 9.9% in 1Q25, driven by OUE Downtown and One Raffles Place. [[2]] OUE REIT renewed 5.0% of expiring leases (18.6% by gross rental income (GRI) in FY25F) in 1Q25. [[2]] Positive single-digit reversion is expected to continue as expiring leases are marked to market. [[2]] Occupancy at Mandarin Gallery increased to 99.5%. [[2]] There’s a noted shift in spending by Chinese tourists towards food and beverage, contrasting with a decline in luxury spending. [[2]] Hospitality Segment Analysis The hospitality segment experienced a decline in revenue and NPI in 1Q25. [[3]] Revenue: S\$23.3m (-13.3% yoy) [[3]] NPI: S\$20.8m (-12.5% yoy) [[3]] This was mainly due to underperformance at Hilton Orchard, partially offset by increased contribution from Crowne Plaza. [[3]] RevPAR at Hilton Orchard was lower by 19.1% yoy in March 2025 (S\$249), attributed to a decrease in travelers from the US, Indonesia, and China. [[3]] Crowne Plaza saw an 8.9% RevPAR growth (S\$247 in 1Q25), benefiting from its proximity to Jewel Changi and Singapore Changi Airport. [[3]] RevPAR estimates have been revised to account for macroeconomic headwinds on travel demand, leading to a 3-4% reduction in FY25-27F revenue forecasts. [[3]] Revised Financial Estimates and Recommendation FY25-27F DPU estimates have been raised by 3.8-4.5%. [[3]] The rating is upgraded to “Add” based on an attractive FY25F DPU of 7.3% and an undemanding valuation (P/BV at 0.47x). [[3]] Potential re-rating catalysts include accretive acquisitions. [[3]] Downside risks include a slowdown in global travel demand and unexpected lease non-renewals. [[3]] Key Figures and Charts Figure 1: Results comparison [[2]] Figure 2: Earnings revision [[2]] Figure 3: OUE REIT dividend yield of 7.2% in Apr 2025 [[2]] Figure 4: OUE REIT yield spread of 4.2% in Mar 2025 [[2]] Figure 5: OUE REIT P/BV ratio of 0.47x in Apr 2025 [[3]] Figure 6: SREIT peer comparison [[3]] Earnings Revision Details Revenue forecasts for FY25-27F have been lowered by 3-4% due to revised RevPAR assumptions for Hilton Singapore Orchard. [[2]] Interest expenses for FY25F-27F are expected to be lower, based on a reduced cost of borrowings in 1Q25 and potential savings from refinancing OUE Allianz Bayfront borrowing in 2H25F. [[2]] Overall, FY25-27F DPU estimates are raised by 3.8-4.5%, increasing the DDM-based TP to S\$0.33. [[2]] Dividend Yield and Spread Analysis OUE REIT’s dividend yield of 7.2% in April 2025 is close to +1 standard deviation from its historical average. [[2]] The yield spread of 4.2% in March 2025 is slightly above its average yield spread of 4.0%. [[2]] P/BV Ratio Analysis OUE REIT’s P/BV ratio of 0.47x in April 2025 is below -1 standard deviation from its historical P/BV ratio. [[3]] Financial Table FYE Dec (S\$m) FY25F FY26F FY27F FY25F FY26F FY27F FY25F FY26F FY27F Gross revenue 269.3 279.2 287.8 278.9 286.7 295.7 -3.5% -2.6% -2.7% NPI 216.8 225.2 232.4 226.0 232.4 239.9 -4.1% -3.1% -3.1% Income attributable to unitholders 111.0 117.8 123.2 106.9 112.8 118.4 3.8% 4.5% 4.1% DPS (Scts) 2.02 2.13 2.22 1.94 2.04 2.13 3.8% 4.5% 4.1% ESG Overview OUE REIT received a “C” ESG combined score from LSEG (formerly Refinitiv) in FY23. [[4]] Environmental Pillar: B- [[4]] Social Pillar: C+ [[4]] Governance Pillar: D [[4]] ESG Controversies: A+ [[4]] OUE REIT aims to reduce absolute GHG emissions by 40% by FY30 (base year FY17) and reduce water intensity by 25% for commercial assets. [[4]] The REIT targets increased female representation on the Board of Directors (25%) and in senior management (40%). [[4]] OUE REIT aims for green financing to account for 90% of its financing obligations by FY30 and obtained a 3-star GRESB Real Estate Benchmark rating in 2023. [[4]] ESG Analysis LSEG rated OUE REIT low for community (C+) and CSR strategies (C-). [[4]] Improvement in the Governance pillar could enhance the overall ESG score. [[4]] In FY23, 95.7% of OUE REIT’s portfolio was green certified, and 50.3% of its leases are green leases. [[4]] Energy intensity was reduced by 20.9% (vs. base year FY17) for the commercial segment, while hospitality saw an increase of 17.8%. [[4]] An estimated 69.5% of its total borrowings were sustainability-linked loans. [[4]] Key Financial Metrics Gross Property Revenue (S\$m): [[1], [5]] Dec-23A: 285.1 Dec-24F: 295.5 Dec-25F: 269.3 Dec-26F: 279.2 Dec-27F: 287.8 Net Property Income (S\$m): [[1], [5]] Dec-23A: 235.0 Dec-24F: 234.0 Dec-25F: 216.8 Dec-26F: 225.2 Dec-27F: 232.4 Net Profit (S\$m): [[1], [5]] Dec-23A: 190.0 Dec-24F: (102.5) Dec-25F: 78.7 Dec-26F: 86.7 Dec-27F: 93.8 Distributable Profit (S\$m): [[5]] Dec-23A: 115.3 Dec-24F: 113.7 Dec-25F: 111.0 Dec-26F: 117.8 Dec-27F: 123.2 DPS (S\$): [[5]] Dec-23A: 0.021 Dec-24F: 0.021 Dec-25F: 0.020 Dec-26F: 0.021 Dec-27F: 0.022 Dividend Yield: [[5]] Dec-23A: 7.60% Dec-24F: 7.49% Dec-25F: 7.33% Dec-26F: 7.74% Dec-27F: 8.05% P/BV (x): [[5]] Dec-23A: 0.46 Dec-24F: 0.47 Dec-25F: 0.47 Dec-26F: 0.47 Dec-27F: 0.47 Net Property Income Margin: [[6]] Dec-23A: 82.4% Dec-24F: 79.2% Dec-25F: 80.5% Dec-26F: 80.7% Dec-27F: 80.7% Asset Leverage: [[5]] Dec-23A: 33.9% Dec-24F: 35.3% Dec-25F: 35.4% Dec-26F: 35.3% Dec-27F: 35.1% Major Shareholders OUE: 17.7% [[3]] Gordon and Celine Tang: 18.1% [[3]] Analyst Information LOCK Mun Yee [[3]] T: (65) 6210 8606 E: [email protected] LI Jialin [[3]] T: (65) 6210 8663 E: [email protected]
