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OUE Commercial Real Estate Investment TR Releases Better-Than-Forecasted Results – Should Investors Rejoice?

Ser Jing - Ready for a New REIT-on-the-block, OUE Certainly Thinks So (pic)

The newly-listed OUE Commercial Real Estate Investment TR (SGX: TS0U) is a real estate investment trust sponsored by OUE Ltd (SGX: LJ3). Since its listing on the Mainboard exchange in Singapore on 27 January 2014, it has been trading near its listing price of S$0.80 per unit.

The REIT has a focus on commercial real estate and currently owns two properties: OUE Bayfront in Singapore; and Lippo Plaza Property in Shanghai, China. Both properties are mainly used for office purposes with a small section of space dedicated for retail.

OUE Commercial REIT had released its second quarter earnings yesterday and delivered a pleasant surprise for its investors. Let’s take a closer look.

Higher distributions

For the first half of 2014 (technically, the dates run from 27 January 2014 to 30 June 2014), OUE Commercial REIT was able to exceed its own forecasts given in its listing prospectus with a stellar set of results.

The REIT earned gross revenue of S$32.5 million, net income of S$14.6 million, and income available for distribution of S$21.1 million. These figures were 0.2%, 9.8% and 4.8% higher than what the REIT’s number crunching had forecasted them to be in its own listing prospectus.

With distributable income of S$21.1 million, OUE Commercial REIT’s distribution per unit (DPU) came in at 2.43 Singapore cents, some 4.7% higher than predicted. This gives OUE Commercial REIT an annualised distribution yield of 5.9% based on its current unit price of S$0.83.

Balance sheet

The REIT ended the quarter with an aggregate leverage ratio of 39.5%. That’s a rather high figure but on the flip side, the REIT has plenty of cover for the interest expense of its borrowings with its interest service ratio at 4.0. In addition, the REIT also has no need to refinance any borrowings until 2017 and this gives the trust more flexibility in planning its cash flows. More than half of its borrowings (57.6% to be exact) has fixed interest rates and this provides another layer of protection for the REIT ‘s income when it comes to the potential increase in the general interest rate environment in the future.

As of 30 June 2014, the REIT has an average cost of debt of 2.59% and an average term of debt of 3.45 years.

Portfolio performance

OUE Bayfront currently contributes about 66% and 70.8% to the REIT’s gross rental income and asset value respectively. Investors of OUE Commercial REIT will be happy to know that the property has been enjoying an occupancy rate of 100% since the end of 2013. Meanwhile, Lippo Plaza’s occupancy is a little lower at 93.6%.

OUE Commercial REIT expects Singapore Grade “A” office space – of which OUE Bayfront is a provider – to be in high demand. As for Shanghai, the REIT sees demand stabilising for office space in the central business district there. With these in mind, it does seem that the REIT’s distribution yield enjoyed by investors should be sustainable for the foreseeable future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.