OUE Commercial REIT: Hospitality recovery is the wild card
- FY22 DPU -18% y-o-y to 2.12 Scts, in line, led by divestment of OUE Bayfront, lower income support, and higher interest costs. 4Q22 estimated core DPU was relatively flat q-o-q
- Key positives: i) HSO exceed minimum rent with limited capacity; ii) RevPAR surpassed pre-COVID level; iii) Mandarin Gallery rents bottoming out
- Key data to watch: i) ICR declined below 2.5x but gearing below 40%; ii) higher interest costs
- Maintain HOLD; TP of S$0.35.
- FY22 DPU fell 18% y-o-y to 2.12 Scts, in line with our estimates, mainly due to the partial divestment of OUE Bayfront, lower income support for OUE Downtown (no income support after Jul 22), absence of retained distributions (S$5m) in FY21, higher interest expenses, and rental relief extended to Lippo Plaza tenants due to the Shanghai lockdowns (c.S$4.8m in FY22).
- 4Q22 estimated DPU grew 17% q-o-q to 0.56 Scts, mainly due to capital distributions of S$4.6m. Excluding capital distributions, 4Q22 estimated DPU of c.0.47 Scts is relatively stable q-o-q.
- The commercial portfolio’s 4Q22 revenue and NPI grew 18% y-o-y and 23% y-o-y, respectively, mainly due to lower rental rebates and property expenses.
- Hilton Singapore Orchard’s (HSO) revenue has surpassed its minimum rent of S$45m in FY22, even though the Orchard Wing (446 rooms) has yet to open. As such, 4Q22 hospitality revenue surpassed the minimum rent by c.5% (c.S$0.9m) while that of FY22 surpassed minimum rent by 1.3%. The Orchard Wing has been opened since 1 Jan 23 with the full inventory of 1,080 rooms.
- Gearing trended lower to 38.8% vs. 40.3%, while average cost of debt inched up by 0.2ppt q-o-q to 3.4% from 3.2% in 3Q22.
- As at Dec 22, adjusted ICR (including a write-off of upfront fees from early refinancing) was 2.4x vs. 2.7x as at Sep 22. While the ICR ratio has declined to below 2.5x, gearing is well below 45% currently and could likely improve with the recovery of the hospitality sector.
- Aside from the remaining S$273m in loans maturing in Sep 23 (11.8% of total debt), there are no refinancing needs until 2025.
Strong operational recovery, especially from the rebranded HSO, partially offset by weaker performance from Lippo Plaza
- Portfolio occupancy inched up marginally to 92%, mainly from higher occupancy at Mandarin Gallery (+2.7ppt q-o-q to 91.9%, excluding short-term leases) while the Singapore office held relatively stable at 95.5%. Lippo Plaza occupancy fell by 4.8ppt to 82.6%, mainly led by office occupancy, which fell by 5.7ppt q-o-q to 79.9%.
- OUE Downtown occupancy held stable; signing rents continue to trend up but average passing rents are still 15% below the last rental support level. Income support for OUE Downtown ended in Jul 22. While average signing rents continue to trend upwards, surpassing S$8.80psf, average passing rents of S$7.98psf/month are c.15% below the last rental support level.
- SG office reversions remained positive, though the higher end of the range moderated (3.2% to 8.3% in 4Q22 vs. 1.6% to 9.2% in 3Q22); Lippo Plaza saw negative reversions of 11.5% in 4Q22.
- Mandarin Gallery occupancy continues to improve; it achieved strong positive reversions of 10.4%. Overall occupancy improved by 2ppt q-o-q to 95.4% (93.4% in 3Q22). Excluding short-term leases, occupancy improved 2.7ppt q-o-q to 91.9%. Mandarin Gallery achieved strong positive reversions of 10.4% (vs. 9.2% in 3Q22), in line with other retail landlords.
- 4Q22 shopper traffic improved to 95% of pre-COVID levels but tenant sales remained flat q-o-q, at 85% of pre-COVID levels.
- RevPAR surpassed that of pre-COVID. HSO RevPAR was recorded at S$397, c.+20% y-o-y, 71% higher than the pre-COVID record-high RevPAR of the previous Mandarin Orchard Singapore (1Q18 RevPAR was S$232). Similarly, CPCA RevPAR of S$211 in 4Q22 is close to the pre-COVID high of S$212 in 3Q19. Overall RevPAR hit a record high of S$310.
- Asset valuation was 2.4% higher y-o-y, despite cap rates staying relatively stable. Singapore assets, except for Mandarin Gallery, recorded higher valuations despite cap rates remaining stable; also, OUE Bayfront saw some cap rate compression of c.12.5bps. Lippo Plaza saw its valuation decline by 11.3%, largely impacted by forex (local currency decline was only 1.5%).
Maintain HOLD; TP of S$0.35. We maintain our HOLD rating and TP of S$0.35. We raised our FY23F DPU marginally by 1% to adjust to the slightly higher amount of remaining capital distributions expected to be paid out in FY23F, while we trimmed our FY24F DPU by 2%.
We continue to keep a watch on key turnaround factors that my drive stronger growth going into FY23. Key positive catalysts that could change our view include i) hospitality recovering stronger and faster than expected to more than offset higher expenses and income drop and ii) the office income growth trend continuing longer than expected.
Interim Income Statement (S$m)
FY Dec | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
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Gross revenue | 116 | 116 | 126 | 8.0 | 8.5 |
Property expenses | (21.2) | (22.2) | (22.4) | 5.6 | 0.6 |
Net Property Income | 95.2 | 93.6 | 103 | 8.6 | 10.4 |
Other Operating expenses | (5.1) | (3.7) | (16.2) | 217.6 | 335.1 |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 9.17 | 8.30 | 28.8 | 214.2 | 247.2 |
Net Interest (Exp)/Inc | (34.3) | (31.4) | (23.5) | 31.4 | 25.1 |
Exceptional Gain/(Loss) | (56.3) | 0.0 | 140 | nm | nm |
Net Income | 8.63 | 66.8 | 232 | 2,589.3 | 247.7 |
Tax | (7.2) | (6.3) | (4.9) | (32.6) | (23.6) |
Minority Interest | (13.9) | (3.0) | (9.1) | 34.4 | 203.4 |
Net Income after Tax | (12.5) | 57.4 | 218 | nm | 280.0 |
Total Return | (12.5) | 57.4 | 218 | nm | 280.0 |
Non-tax deductible Items | 81.0 | 6.22 | (157) | (294.3) | (2,629.6) |
Net Inc available for Dist. | 64.4 | 59.5 | 56.7 | (12.0) | (4.8) |
Ratio (%) |
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Net Prop Inc Margin | 81.8 | 80.8 | 82.2 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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Source of all data: Company, DBS Bank
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