Confluence of headwinds and tailwinds
3Q22 results were impacted by lower income support and higher interest expenses; no more refinancing needs until Sep 23.
- 3Q22 DI fell 13% y-o-y to S$26m while estimated DPU fell 14% y-o-y to 0.48 Scts, in line with our FY22F core DPU estimates. The decline was mainly due to lower income support for OUE Downtown and higher interest expenses.
- The hospitality segment continues to draw minimum rent despite a strong improvement in RevPAR.
- Gearing inched up to 40.3% vs. 39.1% in 2Q22. Average cost of debt inched up q-o-q to 3.2% (3.6% including upfront fees from early refinancing) from 3.1% in 2Q22.
- OUECT obtained an unsecured S$978m sustainability-linked loan (SLL) in Aug 22 to refinance its existing secured borrowings. As a result, there are no further refinancing requirements until Sep 23, when 12% (S$283m) of total debt is due.
- ICR ratio dipped to 2.7x from 2.9x in 2Q22. Hedging ratio has inched down to slightly below 70% to 69.2%, vs. 76.3% in 2Q22.
Strong recovery trends from hospitality with RevPAR close to or higher than pre-COVID; retail rents have bottomed out and signings are close to pre-COVID rents.
- Portfolio occupancy remained relatively stable at 91.2%, mainly held up by the office portfolio (+1ppt q-o-q), offset by Mandarin Gallery, which saw a slight decline of 1.1ppt q-o-q to 89.2%.
- SG office reversions remained strong at 1.6% to 9.2%, while it remains challenging for Shanghai. OUE Bayfront continues to see the strongest reversions and we estimate rents signed in 3Q22 could have crossed S$15psf. Lippo Plaza remains challenging, recording -5.4% reversions, and occupancy continues to decline to 87.4% (-1.6ppt q-o-q).
- OUE Downtown remains relatively stable with +1.6% reversions and occupancy at 93.7% (+0.7ppt q-o-q). Signing rents have improved from below S$8psf during COVID to now close to S$9psf. Income support ended in Jul 22.
- Mandarin Gallery recorded strong positive reversions of 9.2% in 3Q22, with signing rents close to pre-COVID levels. With the improved retail sentiment, OUECT is refocusing on optimising rents and recorded strong +9.2% reversions in 3Q22. Management believed that retail rents have bottomed out in 3Q22 and are signing rents close to pre-COVID rates.
- Shopper traffic and sales in 3Q22 were stable q-o-q at 90% and 85% of pre-COVID levels, respectively.
- OUECT will be raising its service charges for the Singapore commercial portfolio to partially offset some higher operating costs.
- Rental rebates reduced significantly q-o-q to S$0.9m as Shanghai came out of lockdown. OUECT extended S$0.9m (vs. S$5m in 2Q22) of rental relief to its Shanghai tenants. YTD, rental rebates given out are estimated to be S$7m.
- RevPAR +16% q-o-q to S$262; rebranded Hilton Singapore Orchard’s RevPAR surpassed pre-COVID level of previous Mandarin Orchard Singapore. Hilton Singapore Orchard’s RevPAR was recorded at S$332, 44% higher than pre-COVID RevPAR of the previous Mandarin Orchard Singapore (3Q22 RevPAR was S$231). Hilton Singapore Orchard is expected to complete its Orchard Wing (446 rooms) by end-2022.
- Management continues to see strong demand for hospitality and a pick-up in MICE events. They believe that contributions from this portfolio will likely improve to above minimum rents when the Orchard Wing (446 rooms) at Hilton Singapore Orchard opens, which is expected by 1 Jan 2023.
- Focus on capital management with no near-term plans to overstretch balance sheet for acquisitions. While management continues to monitor the transaction market for opportunities, they do not expect any potential acquisitions in the near term and will continue to ensure that the balance sheet is well managed, especially in this volatile macroeconomic environment.
Maintain HOLD; lower TP to S$0.35. We maintain our HOLD rating and lower our TP to S$0.35 to factor in a higher risk-free rate and interest rates. We moderate our FY22F-FY24F DPU by 2% to 11% to incorporate these higher interest rates on its recently refinanced debt and unhedged debt.
Given that interest rates are continuing to trend higher with no sign of a pivot at the moment, we maintain our cautious stance on OUECT and continue to keep a watch on key turnaround factors that may drive growth from FY23 onwards. Key positive catalysts that could change our view include i) a hospitality ramp-up and recovery to pre-COVID levels at full capacity, ii) the office income growth trend continuing longer than expected, and iii) China reopening.
We note that OUECT may look to utilise the remaining S$9m in capital distributions post the partial divestment of OUE Bayfront to smoothen out some earnings. However, pay-out will be considered at the end of the year.
