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OUE Commercial REIT’s First-Quarter Results: Quick Take

OUE Commercial Real Estate Investment Trust (SGX: TS0U) released its first-quarter results for 2019 this week. Here’s a quick look at how it performed, key portfolio statistics and what’s in store for the future.

Operating results

Although revenue and net property income increased by 25.5% and 23.5% respectively, distribution per unit (DPU) declined by 19.6%. The higher revenue and net property income were due to the contribution from OUE Downtown Office, which was acquired on 1 November 2018.

However, DPU dipped due to a larger unit base following the rights issue used to fund the acquisition, as well as higher finance costs this quarter. Interest expenses rose 35.8% from the corresponding quarter last year due to the higher loan volume used to finance part of the acquisition.

Balance sheet

Debt remains relatively high, with the debt-to-asset ratio standing around 39.4%. In Singapore, the regulatory ceiling for REITs is 45%. Its interest expenses are also relatively high compared to its earnings, with the interest service ratio standing at 3.3 times. The interest service ratio is calculated by dividing the REIT’s income by its interest expense.

The higher the interest service ratio, the more easily a REIT can pay off its financial obligations. In my books, I like to see REITs that have an interest service ratio of above 5.

On a brighter note, OUE Commercial REIT has only S$5 million of debt maturing this year.

Source: OUE Commercial REIT 2019 Q1 Earnings Presentation

Portfolio statistics

Its portfolio’s committed occupancy was 94.0% as of 31 March 2019. Rental reversions in its Singapore properties were positive in the reporting quarter, which should improve rental income down the road.

The trust’s portfolio weighted average lease term to expiry was 2.3 years by gross rental income while 14.9% of its leases are due for renewal this year.

Most notably, One Raffles Place, has 43.1% of gross rental income up for renewal in 2019 and 2020, with expiring rents below current market rates. This should provide further upside potential for the REIT.

Outlook and valuation

According to CBRE, Grade A CBD core office rents in Singapore rose 3.2% from the previous quarter, marking the seventh consecutive quarter of growth, and represents a 24.6% increase from the trough in 2017.

Management said in its presentation slides, “Given the benign medium-term supply outlook and the narrowing of the gap between market rents and expiring rents in OUE C-REIT’s Singapore properties, we continue to expect positive operational performance in 2019.”

However, in Shanghai, significant new supply and softer demand from a slower economy mean rental growth is expected to be subdued in the near term.

At the time of writing, OUE Commercial REIT units trade at S$0.505 apiece. This translates to a price-to-book ratio of 0.595 and a distribution yield of 5.9%.

 

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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 Jeremy Chia doesn’t own shares in any companies mentioned.