OUE REIT: Resilient Commercial Growth Amidst Hospitality Challenges

Date: October 24, 2024
Broker: Maybank Research Pte Ltd

Overview

OUE REIT is one of Singapore’s largest diversified real estate investment trusts (REITs), with a total asset under management (AUM) of SGD 6.3 billion as of the end of FY23. It owns and manages a diversified portfolio of commercial and hospitality properties located in prime business hubs, primarily in Singapore and Shanghai. The REIT was listed on the Singapore Exchange (SGX) in January 2014 and is sponsored by OUE Limited, a leading real estate and healthcare group.

Performance Summary

3Q Business Update:

Net Property Income (NPI) declined by 3.7% year-on-year (YoY), with overall revenue and NPI recorded at SGD 74.8 million and SGD 60.3 million, respectively. The dip was primarily attributed to higher property taxes on hotels, lower contributions from Lippo Plaza in Shanghai, and a high base effect from the previous year.
The commercial segment showed resilience, with NPI growing 0.3% YoY despite a 1.1% drop in revenue. Better cost management contributed to this performance.
The hospitality segment saw an 8.9% drop in NPI YoY, mainly due to higher property taxes and changes in the visitor mix impacting hotel revenue per available room (RevPAR).

Singapore Office and Retail Portfolio

Occupancy Rates: Singapore office occupancy increased slightly to 95.4% from 95.2%, accompanied by a 10.8% rent reversion (compared to 11.7% in 2Q).
Mandarin Gallery: The high-end mall saw occupancy rates dip to 95.3% from 97.7% in the previous quarter, with a positive rent reversion of 16%.
Focus: OUE REIT is focused on tenant retention and optimizing occupancy. The office segment may experience transitional vacancies, but the emphasis remains on stable occupancy levels.

Shanghai Lippo Plaza

Performance: Office occupancy declined further to 74.6%, and rent reversions remained negative. Retail occupancy, however, held steady at 97.8%.

Hospitality Portfolio

RevPAR Trends:
- Hilton Singapore Orchard (HSO) saw a decline in RevPAR by 8.6%, attributed to a high base from last year and shifts in visitor demographics.
- Crowne Plaza Changi Airport (CPCA) reported a strong 30.3% increase in RevPAR, rebounding from last year’s low base due to asset enhancement initiatives (AEI).

Financial Position

Gearing: Gearing increased slightly to 39.3% from 38.7% in the previous quarter, with a fixed-rate hedge ratio rising to 70.5%.
Debt Cost: The borrowing cost increased marginally to 4.8% from 4.7%.
Coverage Ratio: Interest coverage ratio (ICR) slightly decreased to 2.1x from 2.2x.
Outlook: Management anticipates a moderating environment for the hospitality sector, with a focus on achieving a 2-3% RevPAR growth rate next year compared to around 12% growth year-to-date (YTD).

Investment and Growth Strategy

OUE REIT aims to grow organically and inorganically by acquiring third-party commercial assets in developed markets. It continues to invest in sustainable financing, with 95.7% of its portfolio being green-certified and 50.3% comprising green leases as of 2023. The REIT’s sustainability framework focuses on environmental stewardship, social impact, and trust-building.

Valuation and Rating

Maybank Research retains a “BUY” rating for OUE REIT, with a revised target price of SGD 0.34 (previously SGD 0.36). The lower target price reflects a downward revision of Distribution Per Unit (DPU) estimates by 2.2% for FY24-26, primarily due to lower NPI margins, particularly in the hospitality segment. Despite these adjustments, the REIT remains an attractive investment with a 6.5% yield and a price-to-book (PB) ratio of 0.4x.

Price Drivers and Risks

Price Drivers:

Stable demand in the commercial segment.
Successful refinancing initiatives, including Singapore’s largest sustainability-linked loan.
Investment-grade rating (BBB-) awarded by S&P with a stable outlook.

Risks:

Transitional vacancies and hybrid work patterns affecting office leases.
Moderating RevPAR growth due to increased supply and fewer large events in Singapore.
Higher-for-longer interest rates impacting financing costs.

Sustainability Efforts

OUE REIT has a strong focus on sustainability, with a dedicated Sustainability Steering Committee. The REIT has made progress in green financing, energy efficiency, and ESG data collection, achieving a Three-Star Rating from GRESB in 2023. Future improvements include setting net-zero targets, enhancing board diversity, and disclosing more comprehensive sustainability metrics.

Conclusion

OUE REIT remains a stable and diversified investment option, backed by a strong portfolio and a strategic focus on growth through acquisitions and sustainability. Despite some challenges in the hospitality segment, the REIT’s commercial properties continue to drive its overall performance.