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OUE Commercial REIT Reports Huge Drop In Distributions In Its Latest Quarterly Earnings Update

Yesterday evening, OUE Commercial REIT (SGX: TS0U) reported its 2018 third quarter earnings update. For context, OUE Commercial REIT invests in commercial properties and it currently has four properties in Singapore and Shanghai, China; together, the four assets – which include OUE Bayfront, One Raffles Place, and OUE Downtown in Singapore – are valued at S$4.4 billion.

Let’s take a quick look at the important points about OUE Commercial REIT’s latest results:

1. Gross revenue for the reporting quarter decreased by 4.8% year-on-year to S$41.2 million, and net property income followed suit, dropping 5.1% to S$32.3 million.

2. The downward pressure exerted by the falls in revenue and net property income resulted in OUE Commercial REIT’s distributable income for 2018’s third quarter declining by 10.8% to S$15.9 million from a year ago. This led to an 11.3% fall in distribution per unit (DPU) to S$0.0055. There was an adjustment made to the DPU of 2017’s third quarter to account for the issuance of new units from the REIT’s September 2018 rights issue.

3. As of 30 September 2018, OUE Commercial REIT’s gearing stood at 41.4%, which is dangerously close to the regulatory gearing limit of 45%. The REIT’s aforementioned rights issue was meant to help finance the acquisition of OUE Downtown (the deal was closed in October 2018); the REIT said that its gearing would decline slightly to 40.4% after the rights issue and the acquisition.

4. OUE Commercial REIT has a weighted average interest rate of 3.5% per year, a debt maturity of 3.5 years, and a low interest cover of just 3.0. Around 75% of OUE Commercial REIT’s debt have fixed interest rates, which should help to reduce the immediate impact of any interest rate hikes. The REIT has no significant refinancing requirements until 2020.

5. OUE Commercial REIT’s portfolio had an occupancy rate of 94.9% at the end of the reporting quarter with a weighted average lease expiry by gross rental income of 2.4 years. As of 30 September 2018, only 3.5% of the REIT’s leases by gross rental income will expire for the rest of 2018.

6. OUE Commercial REIT’s net asset value for the reporting quarter came in at S$0.89 per unit, but is expected to fall to S$0.70 after the acquisition of OUE Downtown and the issuance of new units from the rights issue.

7. In its latest earnings update, OUE Commercial REIT provided the following useful comments on its outlook:

“According to CBRE, islandwide net absorption for office space in 3Q 2018 strengthened 20% QoQ to 605,077 sq ft on the back of overall stronger leasing activity and the healthy level of pre-commitment at a newly completed decentralised office property. With diversified demand from sectors such as technology, shipping, insurance as well as European and Asia financial institutions, core CBD office occupancy improved 0.5 ppt to 94.6% as at 3Q 2018. As vacancy continued to tighten, Grade A CBD core office rents grew 3.5% QoQ to S$10.45 psf per month.

Given the pace of recovery in office market rents in the Singapore CBD, OUE Bayfront achieved positive rental reversions for the lease renewals and rent reviews committed in 3Q 2018. With One Raffles Place achieving flat rent reversions in 3Q 2018 due to the narrowing gap between expiring rents and market rents, the extent of negative reversions in 2018 is expected to be less than that in 2017.

According to Colliers International, Shanghai CBD Grade A office occupancy edged up 0.3 ppt QoQ to 89.7% as at 3Q 2018, supported by stable net demand of 123,000 sq m for the quarter. With 119,000 sq m of new office supply in 3Q 2018, mainly located in Pudong, Shanghai CBD Grade A office rents softened 0.1% QoQ to RMB10.35 psm per day as at 3Q 2018. In Puxi, Grade A office occupancy rose 0.8 ppt QoQ to 91.5% as at 3Q 2018, while rents increased 0.6% QoQ to RMB 9.51 psm per day.

A significant amount of new office supply is expected to enter the Shanghai market over the next few years. Nevertheless, healthy demand from the finance and technology sectors are expected to underpin occupancy as well as rental rates in Shanghai.”

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The Motley Fool Singapore contributor Esjay contributed to this article. Esjay does not own shares in any companies mentioned. 

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chong Ser Jing does not own shares in any companies mentioned.