OUE Commercial REIT’s Latest Earnings: Future Headwinds Expected

OUE Commercial REIT (SGX: TS0U) released its second-quarter results yesterday evening.

As a brief background, OUE Commercial REIT is a fairly new real estate investment trust in Singapore’s stock market given that it was listed only in 2014. Right now, the REIT’s portfolio has a total of three commercial properties, namely, OUE Bayfront, One Raffles Place, and Lippo Plaza. The first two are located in Singapore while the third is in Shanghai, China.

With that, let’s take a closer look at OUE Commercial REIT’s earnings.

Financial highlights

The following are some of the REIT’s latest financial figures:

  • For the quarter ended 30 June 2016, the REIT’s revenue came in at S$45.7 million, which was up by 132% compared to the year before.
  • Net property income (NPI) followed suit with a similar jump of 140% to S$35.2 million. The huge increases in revenue and NPI in the reporting quarter was due to contributions from One Raffles Place which was acquired in October 2015. But even if results from the new property were excluded, OUE Commercial REIT’s NPI would still have posted organic growth of 15.9% year-on-year.
  • The amount available for distribution in the reporting quarter came in at S$17.7 million compared to S$12.8 million the year before, an increase of 38.6%.
  • Consequently, the REIT’s distribution per unit (DPU) for the quarter jumped by 34.7% from 1.01 cents in the year before to 1.36 cents.
  • OUE Commercial REIT ended the reporting quarter with a net asset value per unit of S$0.91, down 17.3% from S$1.10 seen at end-June 2015.
  • Moving on to the debt profile, the aggregate leverage had increased from 37.9% in the second-quarter of 2015 to 40.2%. Meanwhile, the cost of debt had also increased from 2.74% to 3.53%. The good thing is 79.5% of the REIT’s borrowings have fixed interest rates now, up from 72.7% a year ago.
  • As of 30 June 2016, OUE Commercial REIT has S$348 million in borrowings (representing 28% of total debt) that will come due in 2017. Earlier this year, the REIT managed to refinance S$30 million worth of loans with a new 8-year term loan that expires in 2024.

Business highlights

OUE Commercial REIT reported a portfolio-wide occupancy rate of 94.5%, which is down slightly from the 95.3% seen in the second-quarter of 2015.

The weighted average lease expiry (WALE) by gross rental income came in at 2.8 years, a slight decline from the 3.0 years reported a year ago.

Investors may be interested to know that all three of the REIT’s properties enjoyed positive rental reversions in the second-quarter of 2016. The numbers were 1.8%, 2.1%, and 9.0% for OUE Bayfront, One Raffles Place, and Lippo Plaza, respectively.

The road ahead

In the earnings release, OUE Commercial REIT cited data from CBRE showing how Grade A office rents in the second-quarter of 2016 had contracted for the fifth-consecutive quarter to S$9.50 per square feet per month. Meanwhile, net demand for office space across Singapore in the second-quarter of 2016 “continued to be negative at -74,741 square feet.”

OUE Commercial REIT also warned that “with demand continuing to be muted, the completion of major new office developments from 3Q 2016 is expected to impact vacancy.”

Regarding Shanghai, Grade A office vacancy rates in the area’s central business district had increased “mainly due to the completion of four new office projects totaling  121,000 sq m in 2Q 2016, as well as net absorption turning negative at -69,000 sq m due to a retreat in tenant demand.” This led to Grade A rents in Shanghai’s central business district falling by 0.5% quarter-on-quarter to RMB10.3 per square metre per day.

The REIT added:

“In view of further new supply coming on-stream for the rest of 2016, the overall Shanghai vacancy rate may increase in the coming quarters and hence the rental outlook is expected to be subdued.”

OUE Commercial REIT’s units closed at a price of S$0.69 yesterday. At that price, the REIT has an annualized distribution yield of 7.88% and a price to book value of 0.76.

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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 Esjay does not own shares in any companies mentioned.