Is OUE Commercial REIT a buy at 10% dividend yield?

What happened?

OUE Commercial REIT has seen its share price decline steadily to an all-time low of S$0.20 recently.

The most recent share price decline came after the Fed signaled that interest rates may stay higher for longer. 

Year-to-date, the commercial and hospitality REIT has seen its share price fall by close to 40% as investors flee the REIT sector due to higher interest rates.

The share price performance of OUE Commercial REIT mirrors that of Keppel Pacific Oak US REIT which has also halved in the same period to hit an all-time low of US$0.22.

With a share price of S$0.23, the annualised distribution yield of OUE Commercial REIT is close to 10%.

We examine if OUE Commercial REIT is a good buy for investors looking to build their dividend portfolios. 

What are investor concerns on OUE Commercial REIT?

#1 – Concerns over office exposure

Investors have been worried about OUE Commercial REIT’s office exposure following the challenges faced by Manulife US REIT.

The US office market is taking it on the chin with declining valuations amid low physical occupancy as employees refuse to go back to the office and prefer to work from home.

OUE Commercial REIT’s portfolio comprises three Singapore office buildings, namely OUE Bayfront, One Raffles Place, and OUE Downtown Office.

The office segment takes up around half of the REIT’s revenue as of 30 June 2023.

The REIT manager reported that the Singapore office division enjoyed a committed occupancy of 96.1% and recorded a positive rental reversion of 8.1% for the second quarter of 2023.

Although rental growth is poised to slow because of the weak economy, there are limited new office completions from 2024 to 2026.

This lack of new supply will help to support central business district rents for the foreseeable future.

Its sole China asset, Lippo Plaza in Shanghai, saw occupancy come in at 86.6%.

#2 – DPU affected by the pandemic and interest rates

Apart from concerns over OUE Commercial REIT’s office segment, investors are also pointing out the REIT’s declining distribution per unit (DPU) as another reason for their pessimism.

The table above shows the 5-year financials for OUE Commercial REIT and its DPU history.

Note that the REIT saw a sharp jump in revenue and net property income in 2019 as a result of the merger between OUE Commercial REIT and OUE Hospitality Trust.

Despite the merger, DPU fell by 4.9% year on year in 2019 because of an enlarged unit base.

The REIT’s issued units surged from 2.86 billion in 2018 to 5.39 billion in 2019.[9] 

2020 saw the onset of the pandemic with the REIT doling out rental rebates to tenants and suffering from a sharp fall in occupancy for its hospitality properties.

DPU for that year unsurprisingly plunged by 26.6% year on year.

Although 2021 saw some respite with DPU rebounding by 7%, 2022’s DPU fell by 18.5% year on year because of lower income support for the OUE Downtown Office coupled with higher finance expenses.

The first half of 2023 (1H 2023) saw the continued decline in OUE Commercial REIT’s DPU as finance expenses surged by 74.3% year on year to S$58.2 million.

With the US Federal Reserve’s recent pronouncement that interest rates should stay high for longer, OUE Commercial REIT may see its average cost of debt creeping up from its current 4.1% as only 68.2% of its loans are on fixed rates.

#3 – Lack of acquisitions since its merger

OUE Commercial REIT has also not had any major acquisitions since it merged with OUE Hospitality Trust.

The REIT listed with just two assets – OUE Bayfront and Lippo Plaza, back in 2014.

It conducted just two major acquisitions – that of a 67.95% effective interest in One Raffles Place along with OUE Downtown Office, in 2015 and 2018, respectively.

Since its merger, the REIT manager has only conducted a divestment of its 50% interest in OUE Bayfront at a 26.1% premium to its purchase price.

The five-year acquisition drought may explain why the REIT has failed to meaningfully boost its asset base.

What investors may like about OUE Commercial REIT

#1 - Asset enhancement initiatives announced

While OUE Commercial REIT has not made major acquisitions, it has announced various asset enhancement initiatives on its assets. 

Earlier, the REIT conducted an asset enhancement initiative (AEI) for its Hilton Singapore Orchard property.

This AEI was completed at the beginning of this year and is now Hilton’s flagship Singapore hotel with 1,080 rooms.

Besides adding new income-generating spaces, the hotel was also fitted with MICE (meetings, incentives, conventions, and exhibitions) amenities and sustainability initiatives.

The hotel contributed nearly a quarter of 1H 2023’s revenue for OUE Commercial REIT and enjoyed a 16.5% year-on-year jump in revenue per available room (RevPAR) to S$246.

Another AEI, this time for its Crowne Plaza Changi Airport hotel, was announced in August 2023.

Costing S$22 million, the AEI will see the addition of 10 premier pool rooms along with two suites to capture the recovery in tourism and air travel anticipated in 2024 and beyond (see below).

New meeting spaces will also be constructed to cater to MICE demand with the bar converted into a contemporary club lounge.

The hotel’s gym will be revamped with new equipment to cater to both leisure and business travellers.

Slated to be completed by the end of 2023, this AEI is expected to boost DPU and generate a return on investment of around 10%.

Recently, we spoke to the CEO of OUE Commercial REIT to understand his plans for the REIT with the AEIs.

#2 - Tourism industry continues to recover

These two AEI are also timely as Singapore sees a strong rebound in tourist numbers as economies reopen and air travel resumes.

The average revenue per available room (RevPAR) for hotels in Singapore also reached a multi-year high of S$261 in July 2023. 

The Singapore Tourism Board expects tourism activity to recover to pre-pandemic levels in 2024 barring unforeseen circumstances.

Already, the recent F1 Singapore Grand Prix night race saw more than 260,000 fans, exceeding the 250,000 that was projected by race promoters.

Hotel bookings have also increased sharply for the first half of 2024 with international acts Coldplay and Taylor Swift set to perform in the island nation in January and March, respectively

The completion of the AEIs, together with the tourism rebound, could spell good news for OUE Commercial REIT.

What would Beansprout do?

OUE Commercial REIT’s share price has fallen due to concerns over its office exposure, as well as lack of acquisitions following its merger with OUE Hospitality Trust.

Despite the challenges faced by OUE Commercial REIT, there could be some light at the end of the tunnel.

For example, OUE Commercial REIT has started on various asset enhancement initiatives with the objective of boosting its distributions.

Its hospitality assets could also benefit from the recovery in tourist arrivals in Singapore.

For now, analysts remain positive on the prospects of OUE Commercial REIT, with a consensus target price of S$0.36 as of 26 September 2023. 

This represents a potential upside of more than 50% compared to its price of S$0.23 as of 22 September 2023. 

OUE Commercial REIT is expected to offer a forward dividend yield of 9.5%, above the forward dividend yield of 6.7% offered by Keppel REIT and 6.0% offered by Mapletree Pan Asia Commercial Trust. 

Check out our REIT comparison tool to compare REITs and find the best REIT for your portfolio.

Related links:

• OUE Commercial REIT share price and analysis
• OUE Commercial REIT dividends

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