Is OUE Commercial REIT (SGX: TS0U) a Buy at Its Share Price of S$0.38?
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Is OUE Commercial REIT (SGX: TS0U) a Buy at Its Share Price of S$0.38?

profileSudhan P
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OUE Commercial REIT‘s (SGX: TS0U) share price (technically known as unit price for REITs) has taken a hit due to the Covid-19 pandemic. 

Its unit price has plummeted around 30% since the beginning of 2020 to trade at S$0.38 at the time of writing.

At one point in March, OUE Commercial REIT’s unit price was down almost 50% to a low of S$0.29.

With the steep decline in the REIT’s units, is there an opportunity for long-term investors to invest in it?

Let’s explore using my 10-step guide to pick the best Singapore REITs.

How to pick the best REITs

As a summary, here are the 10 steps I use to pick the best Singapore REITs:

  1. Growth in Gross Revenue and Net Property Income
  2. Growth in Distribution Per Unit
  3. Property Yield of Between 5% and 9%
  4. Gearing Ratio of Below 40%
  5. Interest Coverage Ratio of Above 5x
  6. Healthy Portfolio Occupancy Rate
  7. Positive Rental Reversions
  8. Presence of Growth Prospects
  9. Acceptable Price-to-Book Ratio
  10. Distribution Yield of Above 5%

Business Background

OUE Commercial REIT, which was listed in January 2014, invests in commercial and hospitality assets.

In September 2019, OUE Commercial REIT merged with OUE Hospitality Trust to become one of the largest diversified REITs.

OUE Commercial REIT’s portfolio, as of 31 March 2020, had seven properties across the commercial and hospitality segments in Singapore and Shanghai, China.

OUE Commercial REIT overview (as of 31 March 2020)
Source: OUE Commercial REIT investor presentation

OUE Commercial REIT is managed by OUE Commercial REIT Management Pte Ltd, a wholly-owned subsidiary of OUE Ltd (SGX: LJ3).

1. Revenue and Net Property Income (NPI) Check

Check for: Increasing revenue and NPI

OUE Commercial REIT has a financial year that ends on 31 December every year.

The following table shows how OUE Commercial REIT’s revenue and NPI have been over the past five years:

 FY2015FY2016FY2017FY2018FY2019Compound annual growth rate (CAGR)
Revenue
(S$' million)
101.0177.8176.3176.4257.326.3%
Net property income
(S$' million)
75.6138.6138.2138.2205.028.3%

The REIT’s revenue and NPI have been flat from 2016 to 2018.

However, in 2019, they saw huge jumps due to the addition of OUE Hospitality Trust’s properties into the mix, as well as a full-year contribution from OUE Downtown Office (acquired in November 2018).

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Next, let’s find out how OUE Commercial REIT’s DPU performance has been from 2015 to 2019.

 FY2015FY2016FY2017FY2018FY2019CAGR
Distribution per unit (Singapore cents)
4.385.184.673.483.31-6.8%

DPU performance has been dismal in the last five years with DPU falling from 4.38 Singapore cents in 2015 to 3.31 Singapore cents last year.

Verdict: Fail

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

Last year, OUE Commercial REIT’s NPI stood at S$205.0 million, and its portfolio value was S$6.77 billion.

This translates to a property yield of 3%, which is too low for liking.

Verdict: Fail

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 March 2020, OUE Commercial REIT’s gearing ratio was 40.2%, down slightly from 40.3% at the end of 2019, but still above my threshold of 40%. OUE Commercial REIT leverage ratio (as of 31 March 2020)Source: OUE Commercial REIT investor presentation

Verdict: Fail

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

OUE Commercial REIT had an interest cover of just 2.9 times, as of end-March 2020, which is not to my liking as well. OUE Commercial REIT interest cover ratio (as of 31 March 2020)Source: OUE Commercial REIT investor presentation

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

As of 31 March 2020, OUE Commercial REIT’s commercial segment, consisting of the office and retail properties, had an occupancy rate of 94.3%.

OUE Commercial REIT occupancy
Source: OUE Commercial REIT investor presentation

Even though the latest occupancy rate is a decline from 2019’s figure of 95.2%, it still looks healthy enough. I’ll be concerned if the occupancy falls below 90%. 

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

OUE Commercial REIT’s office assets in Singapore take up the bulk of its portfolio. 

For 2019, the REIT’s Singapore office properties saw positive rental reversions of between 8% and 17.8%.

Verdict: Pass

8. Growth Prospects Check

OUE Commercial REIT has a three-pronged approach to grow, with growth through acquisitions being one of them.

OUE Commercial REIT growth prospects
Source: OUE Commercial REIT 2019 annual report

On that note, OUE Commercial REIT has a right of first refusal (ROFR) agreement with its sponsor, OUE, to acquire assets.

The ROFR arrangement ensures that OUE offers its pipeline properties to OUE Commercial REIT for purchase consideration first before any other company. Those assets include commercial, hospitality, and/or integrated development properties.

OUE Commercial REIT is also looking to capitalise on the current weak operating environment to re-brand Mandarin Orchard Singapore to Hilton Singapore Orchard for the longer term.

In the REIT’s 2020 first-quarter earnings update, Tan Shu Lin, chief executive of OUE Commercial REIT’s manager, explained further:

“The Manager is also capitalising on the currently weak operating environment to re-brand Mandarin Orchard Singapore as Hilton Singapore Orchard, with the addition of new income-generating spaces to create value and drive sustainable returns. This will better position the hotel, which already enjoys a prime Orchard Road location, to benefit from the expected recovery in the Singapore hospitality sector once travel confidence resumes. The minimum rent in OUE C-REIT’s hotel master lease agreements will continue to provide downside support throughout the renovation and ramping-up period”, added Ms Tan

The refurbishment, which should be completed by end-2021, is expected to produce a return on investment of 10%.

OUE Commercial REIT rebranding of Mandarin Orchard Singapore to Hilton Singapore Orchard
Source: OUE Commercial REIT investor presentation

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At OUE Commercial REIT’s unit price of S$0.38, it has a price-to-book (PB) ratio of 0.62x, which looks undervalued since it’s below 1x.

Verdict: Pass 

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At OUE Commercial REIT’s unit price of S$0.38, its distribution yield is high at 8.7%.

Verdict: Pass

The Final Verdict

OUE Commercial REIT has a final score of 6/10.

The REIT certainly seems cheap since its PB ratio is below 1x and distribution yield is around 9%.

However, through this analysis, I’ve realised that OUE Commercial REIT’s undervalued for a reason. As seen, the REIT’s DPU has been falling over the years, and its property yield is too low, in my opinion.

Therefore, I’ll skip investing in OUE Commercial REIT.

What Are Your Thoughts on OUE Commercial REIT?

Come discuss them and more in the Seedly Community under a page specifically dedicated to OUE Commercial REIT (SGX: TS0U).

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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