CGSI upgrades OUE Reit to ‘add' on improved outlook
[SINGAPORE] CGS International (CGSI) has upgraded its recommendation for OUE Reit to 'add' from 'hold', and raised its price target marginally to S$0.33 from S$0.32.
In a report on Monday (Apr 28), CGSI analysts Lock Mun Yee and Li Jialin said the Singapore-listed real estate investment trust (S-Reit) could see higher interest savings ahead, which would bode well for its distribution per unit (DPU).
They noted that the Reit saw a lower cost of debt at 4.2 per cent in the first quarter of FY2025, which would translate into interest expense savings of close to S$3 million.
For the Q1 ended March, the manager of OUE Reit reported an 11.3 per cent drop in financing costs to S$22.6 million.
'Management expects further interest expense savings from a lower base rate when its share of the OUE Allianz Bayfront borrowing of S$311 million is re-financed in the second half of FY2025,' the analysts added.
Therefore, the research house is raising its DPU estimates for the Reit by 3.8 to 4.5 per cent for FY2025 to FY2027.
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This would mean an 'attractive' estimated DPU yield of 7.3 per cent for FY2025, the analysts said.
In addition, they point out, the Reit is trading at an 'undemanding valuation', with a price-to-book ratio of 0.47 times.
Commercial uplift
In its Q1 business update on Apr 24, the Reit manager reported an 11.9 per cent decrease in revenue to S$66 million, and a 12.1 per cent drop in net property income (NPI) to S$53.2 million.
The manager attributed the decline to the divestment of Lippo Plaza in Shanghai, as well as lower contributions from the hospitality segment due to weaker concerts and Mice pipeline compared to the previous year.
OUE Reit's commercial segment, however, saw positive growth.
On a like-for-like basis adjusted to exclude the recently divested Lippo Plaza Shanghai, revenue and NPI for the segment both rose by 2.2 per cent to S$42.7 million and S$32.2 million, respectively.
Committed occupancy at the Reit's office portfolio improved to 96.3 per cent. In particular, Mandarin Gallery's committed occupancy inched up to 99.5 per cent – the highest since December 2019.
'Management also took note of growing spending on food and beverage in comparison to shrinking luxury spending by Chinese tourists,' the CGSI analysts said.
OUE Reit's office portfolio saw positive rental reversion of 9.9 per cent in Q1, led by OUE Downtown and One Raffles Place; its retail segment at Mandarin Gallery posted positive rental reversion of 4.9 per cent.
The analysts noted that the Reit manager renewed 5 per cent out of the 18.6 per cent of expiring leases by gross rental income in FY2025.
'Management expects reversion of single-digit positive reversion to hold up as expiring leases continue being marked to market,' they added.
Hospitality headwinds?
However, CGSI still sees uncertainty for OUE Reit's hospitality segment.
For Q1 FY2025, the Reit's hospitality revenue fell 13.3 per cent to S$23.3 million, while NPI slid 12.5 per cent to S$20.8 million.
CGSI's analysts said the decline was mainly led by underperformance at Hilton Orchard, as the number of travellers from the US, Indonesia and China dropped.
They noted that revenue per available room (RevPAR) at Hilton Orchard was 19.1 per cent lower at S$249 in March, compared to the year before.
The decline was partially offset by a growing contribution from Crowne Plaza, which saw an 8.9 per cent growth in RevPAR to S$247.
'We lowered our RevPAR assumptions for Hilton Singapore Orchard to factor in the impact of macroeconomic headwinds on travel demand, thus lowering our FY2025-2027 revenue forecasts by 3 to 4 per cent,' said CGSI's Lock and Li.
Units of OUE Reit were down S$0.005, or 1.8 per cent, at S$0.275 on Tuesday.
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