OUE REIT - Underrated Growth Potential

Initiate coverage with BUY 

We initiate coverage on OUE REIT (OUER) with a BUY rating. OUER owns diversified assets mainly in Singapore worth S$6.3 billion. 

Its sponsor is Singapore-listed OUE Ltd, an owner and manager of office, hotel, retail, residential and healthcare properties. 

OUE Ltd holds a 48.6% stake in OUER and 100% of the REIT manager.

Net Property Income expected to rise further 

OUER’s book value increased 1.8% to S$0.603/unit at end-2023. This contrasted with the average 9% decline in book value for Singapore-listed REITs. 

OUER achieved this on the back of: 1) a high occupancy rate of above 95% for its three grade-A Singapore office assets; and 2) asset enhancement at Hilton Orchard Singapore completed in January 2023 and Crowne Plaza Changi Airport in January 2024, which increased income-generating space and room inventory.

We expect net property income to rise further with better RevPAR at its two hotels. Singapore’s robust MICE, sports and concert schedule in 2H24 will draw more tourists and lift demand for hotels. 

OUER’s RevPAR rose 15.8% year on year in 1H24, lifted by higher occupancy rates. The REIT will also enjoy positive rental reversions for its office space. 

This is because its average expiring rents for FY24E and FY25E are currently 10% below market rents. 

OUER’s revised rental was 11.7% higher in 1H24, with high committed occupancy of 95.2%. 

While a potential slowdown in Singapore’s economic growth could lower demand for office space, tenants could also be more inclined to renew leases rather than spend to relocate.

DPU expected to rebound in FY25E

We expect higher interest expense to lower DPU by 7.7% in FY24E. 

But when interest rates ease from FY25E, DPU could rebound by 6.4% in FY25E and 18.7% in FY26E, with higher rents and hotel takings. 

Key Risks

Key risks include higher interest rates, a strong Singapore dollar and decline in tourist arrivals to Singapore. 

If interest rates stay high, higher cost of debt could lower cash flows derived from the assets. It would also limit the scope for new investments.

Management estimates that a 0.25%-point change in interest rate would affect DPU by $0.0004/unit.

A strong Singapore dollar would lower cash flow received from Lippo Plaza. Lippo Plaza contributes about 7.4% of revenue in 1H24. It could also dampen tourism demand in Singapore, which would in turn lower its hotel takings.

Underrated growth potential 

We derived a target price of S$0.32 per unit based on the dividend discount model, on weighted average cost of capital of 9.2% and terminal growth rate of 2%. 

At this value, the yield is 6.0% and 6.4% for FY24E and FY25E, respectively.

In October 2023, S&P Global Ratings issued an investment grade rating on OUER. 

The rating helped to cut the coupon on the REIT’s S$150mn fixed-rate note by 0.25 percentage point to 3.95%. 

OUER is trading at equity yield of 6.9% and 7.3% for FY24E and FY25E, respectively. The spread between equity yield and debt yield looks unjustifiably high and should narrow, in our view.

OUER’s Price-to-Book valuation of 0.47x is one of the lowest amongst listed peers.

To read our analysis in more detail, download the full report here. 

Add OUE REIT to your watchlist and stay ahead of the latest insights and upcoming dividend payments.

To learn more about our outlook on Singapore REITs, read our detailed report on "Singapore REITs - Distributions may remain under pressure"

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Related links:

• OUE REIT share price and share price target 
• OUE REIT dividend history and forecast

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