Date: October 24, 2024
Broker: CGS International Securities

3Q24 Financial Performance

OUE REIT reported a mixed performance for the third quarter of 2024, with revenue and net property income (NPI) showing slight declines. Revenue fell by 1.3% to S$74.8 million, and NPI decreased by 3.7% to S$60.3 million. The decline was mainly due to weaker performance in the commercial and hospitality segments, as well as an upward revision in prior years’ property tax for its hotel assets, which further impacted NPI.

Cost of Debt and Leverage

The company’s aggregate leverage increased slightly to 39.3% by the end of 3Q24. The cost of debt also rose to 4.8%, with an adjusted interest coverage ratio (ICR) slipping to 2.2x. Management indicated that the average funding cost is expected to peak at the current level. OUE REIT has diversified its funding sources, including investment-grade green notes and a Euro Medium Term Note programme established in October 2024.

Commercial Segment Overview

The commercial segment saw a 1.1% decline in gross revenue to S$47 million for 3Q24. The drop was primarily attributed to lower income from Lippo Plaza in China, although net property income (NPI) grew by 0.3% year-on-year to S$35.7 million due to effective cost management. The Singapore office portfolio’s committed occupancy slightly increased to 95.4%, with positive rental reversions of 10.8%. Mandarin Gallery mall also achieved a 16% positive rental reversion, although its occupancy slipped to 95.3%.

Hospitality Segment Insights

The hospitality segment recorded a 1.7% decline in revenue to S$27.8 million, and NPI dropped by 8.9% to S$24.6 million. Revenue per available room (RevPAR) for Hilton Singapore Orchard (HSO) declined by 8.6% to S$315, reflecting a normalization of tourist accommodation spending. However, the Crowne Plaza Changi Airport (CPCA) saw a 30.3% rise in RevPAR to S$259, benefiting from an asset enhancement exercise completed in December 2023. Management anticipates moderate RevPAR growth for 4Q24 due to ongoing trends in tourist spending.

Growth Strategies

OUE REIT aims to increase its hospitality segment’s revenue contribution from 35% to 40% of total revenue in the medium term. The company is also looking for growth opportunities across multiple geographies, including Singapore, Australia, Hong Kong SAR, Japan, and the UK.

ESG Performance

For FY23, OUE REIT achieved a combined ESG score of ‘C’ from LSEG. The Environmental pillar was rated ‘B-‘, Social at ‘C+’, and Governance at ‘D’. Key ESG targets include reducing absolute greenhouse gas emissions by 40% by FY30 (from the base year FY17), as well as water intensity and non-hazardous waste reduction for its commercial assets. The hospitality segment aims to cut energy and water intensity per occupied room by 25% by FY30. As of the end of 2023, 69.5% of its borrowings were linked to sustainability.

Analyst Recommendation

The analysts maintained a “Hold” rating on OUE REIT, with a target price of S$0.34, indicating a potential 13.3% upside from the current price of S$0.30. While the REIT’s share price has shown upside potential, the analysts see limited catalysts for re-rating within the next six months, primarily due to the moderating outlook in Singapore’s hospitality sector.

Risks and Outlook

Key upside risks include potential accretive acquisitions or divestments and stronger-than-expected rental growth in the office and retail segments. Conversely, downside risks involve weaker-than-forecast demand in the leisure and corporate travel sectors, which could affect the hospitality segment, and slower rental growth in the commercial sector.

Price and Shareholder Information

• Current Price: S$0.30
• Target Price: S$0.34
• Market Capitalization: US$1,247 million (S$1,648 million)
• Major Shareholders:
  • OUE Ltd: 17.7%
  • Gordon and Celine Tang: 18.1%

This detailed analysis highlights OUE REIT’s recent financial performance, strategies, and outlook based on the latest report from CGS International Securities.