OUE REIT provided 9M24 operational performance update, which was in line with our expectations.
Revenue and net property income were 75% and 73% of our FY24E estimates. 3Q24 revenue fell 1.3% year-on-year on lower contribution from the hotels.
Net property income fell 3.7% due to upward revision of prior years’ property tax for the two hotels. Excluding this, NPI was 1.2% lower.
Singapore office is the bright spot
Occupancy rate rose 0.2%-point quarter-on-quarter to 95.4%, compared with 1.7%-point decline to 92.2% for core CBD area.
Rental reversions stayed elevated at 10.8% during 3Q24, through lower than 11.7% in 2Q24 and 12.6% in 1Q24.
With more supply coming onstream, office rental growth is expected to slow.
We expect a higher single-digit growth rate for OUE REIT as the expiring rent for 2004-2006 are still 14%-19% below current market rent of S$11.95 for Grade A office.
Shanghai market remains weak
Lippo Plaza office occupancy fell 1.6%-point quarter-on-quarter to 74.6% occupancy rate.
Passing rent fell to RMB8.22 per sqm per day (2Q24: RMB8.37).
The retail component enjoyed 3.3%-point increase in occupancy to 97.8%. Shanghai rents are expected to weaken further in the next few quarters. China accounts for 6.6% of group revenue.
Hospitality revenue fell 1.7% due to normalization of tourist spending
3Q24 RevPAR improved marginally by 0.3% year-on-year to S$296. Higher occupancy at Crowne Plaza Changi Airport lifted RevPAR higher by 30.3% to S$259, offsetting the 8.6% decline at Hilton Singapore Orchard to S$315.
Net property income fell 8.9% year-on-year, due to additional property tax for prior years.
Retail space at Mandarin Gallery were 95.3% occupied, down 2.4%-point from 2Q24.
Average passing rent increased 3.5% to S$21.84. Rental reversions remained high at 16.0% in 3Q24 (2Q24: 28.4%), but could ease from here as leases entered into at Covid-low rates would have expired/renewed.
Gearing increased
Aggregate leverage rose to 39.3% at end-Sep (Jun 24: 38.7%), and interest coverage ratio was unchanged at 2.2x.
The average cost of debt was 4.8% (Jun 24: 4.7%). It secured a 7-year S$180m green notes at 3.9% in Sep, and established a S$2bn Euro Medium-Term Note in Oct.
With 30% of debt on floating rates, borrowing rates could fall in coming quarters.
Management plans to grow hospitality revenue share to 40% (3Q24: 35.0%). It is exploring portfolio reconstitution and acquisitions beyond Singapore to Australia, Hong Kong, Japan and London.
Maintain Buy
We are maintaining our DPU estimates and target price of S$0.32.
Based on our DPU estimates of 1.93 and 2.05 cents for FY24E and FY25E, our target price implies distribution yield of 6.0% and 6.4% for the two years, respectively.
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