OUE REIT (OUEREIT SP/TS0U.SI)
Company Update: Updated 31 May 2024
Resilience amidst challenging market conditions
• Increased topline growth and stable occupancy surpassing pre-pandemic levels. For 1Q24, OUE REIT reported revenue of S$74.9mn, a 9.5% YoY growth. It delivered net property income of S$60.5mn, a 6.9% YoY growth. It also secured positive rental reversion of 12.6% in its Singapore offices and achieved high committed occupancy of 97.6% in Mandrin Gallery, showcasing its stability and competitiveness in the market.
• Positioned for a tourism boom. Singapore’s thriving tourism industry presents a significant opportunity for OUE REIT’s hospitality segment. Anticipating a surge in tourist arrivals driven by a lineup of exciting events and attractions, including concerts and meetings, incentives, conferences and exhibitions (MICE) events, the REIT has strategically completed asset enhancement initiatives (AEIs) for its hotels. This proactive approach has already yielded promising results, with a remarkable 22.7% YoY revenue growth to S$26.9 million in the hospitality segment. Notably, the surge in revenue per available room (RevPAR) by 23.3% YoY to S$280 reflects the REIT’s ability to capitalize on higher room rates amid strong demand from event attendees and tourists.
• Beneficiary of Rate Cuts. Market expectations for a rate cut by the Federal Reserve present a favourable outlook for OUE REIT. With the anticipated rate reduction of 25 basis points in 2024 and the ensuing rate cuts, the REIT stands to benefit from lower borrowing costs, enhancing its financial flexibility and potentially driving higher investor interest. This favourable interest rate path aligns with the REIT’s growth strategy, positioning it for enhanced profitability and value creation in the coming quarters. (Assuming a 25 basis points decrease in interest rates, DPU would increase 0.04 Scents per unit.)
• We initiate an OUTPERFORM recommendation and a TP of S$0.309 based on the DDM valuation method.
Company Background.
OUE REIT currently owns and operates a portfolio of 7 properties. The REIT was assigned a BBB- rating from S&P. Additionally, through its commitment to green initiatives and sustainable practices, OUE REIT has earned a BBB MSCI ESG rating.
1Q24 financial review.
OUE REIT’s revenue and net property income achieved 9.5% and 6.9% YoY growth to S$74.9mn and S$60.5mn respectively, attributed to higher contributions from Hilton Singapore Orchard and the resilient performance of commercial properties in Singapore. However, bottom-lines and dividend distributions are bound to be impacted by higher financing costs due to the current high interest rate environment. Additionally, on 23 April, it obtained an unsecured sustainability-linked loan of S$600mn, resulting in no refinancing requirements till 2H25 where 25% of total debt is due. This early refinancing has also resulted in OUE REIT’s average term of debt lengthening to 2.8 years from its previous 2.2 years.
Valuation & Action
We initiate coverage with an optimistic recommendation and a target price of S$0.309, based on our comprehensive valuation model incorporating a terminal growth rate of 2.0% and a cost of equity of 9.7%. OUE REIT’s favorable credit rating from S&P positions it well for refinancing endeavors, evidenced by the successful increase of its initial loan amount from S$540 million to S$600 million. The additional funds will be used for the early refinancing of existing borrowings due in 2025 and general corporate purposes.
Risks
Economic fluctuations, regulatory changes, and higher-than-expected interest rates.
