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What Investors Should Know About OUE Commercial REIT’s Latest Earnings and Valuation

Photo credit: Rafael Matsunaga. Licence: http://creativecommons.org/licenses/by/2.0/

OUE Commercial REIT (SGX: TS0U) is a REIT that focuses on owning commercial and/or retail properties. Its portfolio currently consists of OUE Bayfront and One Raffles Place in Singapore, and Lippo Plaza in Shanghai, China.

There are two things about the REIT that investors may want to know about right now: Its latest financial performance and valuation.

Financial performance

Here’s a table showing important items from OUE Commercial REIT’s income statement for the fourth quarter of 2017 as well as for the whole year:


Source: OUE Commercial REIT 2017 fourth quarter earnings press release

We can see that 2017 wasn’t a good year for the REIT, as its revenue, net property income, and distribution per unit (DPU) all declined.

OUE Commercial REIT’s revenue was marginally lower in 2017 due to lower one-off income. As for the decline in the REITs DPU, this was due to an enlarged unit base from a private placement of 233.28 million units that happened in March 2017. Proceeds from the private placement were used to partially repay OUE Commercial REIT’s borrowings.

But, there were still some bright spots in the REIT’s business performance. According to its manager:

 “All three properties outperformed their respective office markets and enjoyed higher YoY office occupancy during the year, even as the market office occupancy in both the central business districts of Singapore and Shanghai declined in 2017 due to the completion of significant new office developments. As a result, OUE C-REIT’s portfolio occupancy improved 2 ppt YoY to 96.8% as at 31 December 2017.”

As for its future outlook, OUE Commercial REIT gave the following comments in its latest earnings update:

“OUE C-REIT’s rental income in 2018 may be impacted by the full-year impact of negative rental reversions of leases committed in 2017. Depending on the pace of recovery in spot rents in the Singapore CBD, negative rental reversions may potentially continue into 2018.

However, this is mitigated as only 8.6% of OUE Bayfront’s gross rental income is due for renewal in 2018 and its rental revenue has downside protection from the income support arrangement which will expire only in 2019. At One Raffles Place, its 2018 revenue base would have improved due to the notable increase in committed office occupancy achieved in 2017, thereby mitigating potential negative reversions in 2018.”

In sum, OUE Commercial REIT expects some challenges in 2018 due to the impact of negative rental reversions.

Valuation

There are two useful valuation metrics for assessing REITs. They are the price-to-book (PB) ratio, and the distribution yield.

The table below shows OUE Commercial REIT’s PB ratio and distribution yield. It also shows the respective averages for the two valuation metrics for the 41 REITs that are in Singapore’s stock market.


Source: SGX Stock Facts

We can see that OUE Commercial REIT is trading at a discount to the market average due to its low price to book ratio and low distribution yield.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.