It has not been an easy time for the REIT sector.
The combination of inflation and surging interest rates has dampened investor sentiment as these two headwinds push up operating and finance costs for REITs.
As a result, many REITs have seen their unit prices skidding to a 52-week low.
OUE Commercial REIT (SGX: TS0U), or OUECR, is no exception.
The commercial, retail and hospitality REIT’s unit price has plunged 36.8% year to date and is just a whisker away from its 52-week low of S$0.20.
But with the resumption of air travel and high committed occupancy for its office properties, could the REIT be poised for a rebound?
Let us dig deeper to find out.
A merger, then a pandemic
OUECR owns seven properties within its portfolio that are valued at S$6 billion as of 30 June 2023.
Six of these are situated in Singapore and comprise commercial properties such as OUE Bayfront and Raffles along with hospitality cum retail properties such as Mandarin Gallery, Hilton Singapore Orchard, and Crowne Plaza Changi Airport.
The REIT owns a sole commercial property, Lippo Plaza, in Shanghai, China.
Investors should note that the current OUECR is the result of a merger between OUE Commercial REIT and OUE Hospitality Trust back in September 2019 through a scheme of arrangement.
Back then, the rationale for the merger was to create an enlarged REIT with greater debt headroom to increase its funding capacity to around S$1 billion.
By doing so, OUECR can then undertake larger transactions and asset enhancement initiatives (AEIs).
Unfortunately for the REIT, the COVID-19 pandemic hit shortly after in 2020.
Because of the effects of the pandemic, OUECR saw its distribution per unit (DPU) decline sharply.
DPU fell by 26.6% year on year from S$0.0331 in 2019 to S$0.0243 in 2020.
2021 saw a respite with DPU rebounding by 7% year on year to S$0.026.
However, 2022’s DPU slid by 18.5% year on year to S$0.0212 because of higher interest and property expenses along with the retention of monies for the hospitality segment’s working capital requirements.
For the first half of 2023 (1H 2023), OUECR reported a sharp 74.3% year on year surge in finance costs to S$58.2 million, resulting in DPU slipping 2.8% year on year to S$0.0105.
Asset recycling along with two AEIs
Things may be looking up for the beleaguered REIT.
Although OUECR has announced no acquisitions since its merger, the REIT manager has engaged in asset recycling by divesting its 50% interest in OUE Bayfront for S$1.27 billion in January 2021.
This valuation was a 26.1% premium over OUECR’s purchase price back in 2014.
This transaction helped to unlock the value of the asset and proceeds can be used to optimise the REIT’s capital structure and fund AEIs.
The AEI to transform and rebrand the Hilton Singapore Orchard was first announced in 2020 and was completed at the beginning of this year.
The hotel now has a full inventory of 1,080 rooms and is Hilton’s (NYSE: HLT) flagship hotel in Singapore.
For 1H 2023, Hilton Singapore Orchard saw more direct bookings from the corporate segment which led to a 16.5% year on year jump in revenue per available room (RevPAR) to S$246.
The REIT manager is not standing still and has announced another AEI for Crowne Plaza Changi Airport in early August.
Costing S$22 million, this AEI will add 10 Premier Pool Rooms and two suites designed for families and long-stay guests.
The restaurant will also be revamped to offer Italian fare with a buffet spread and a club lounge and fitness centre will be transformed and modernised.
This AEI is expected to be completed by the end of this year and be accretive to DPU with an anticipated 10% return on investment.
An exciting 2024 beckons
There is more good news in store for OUECR.
International visitor arrivals in Singapore are expected to hit 12 to 14 million for 2023 with a full recovery expected in 2024.
Already in May this year, Singapore saw two straight months of international visitors exceeding the one million mark.
Hotel bookings are also being rapidly filled with many exciting events such as international stars Coldplay and Taylor Swift staging multi-day concerts in Singapore.
Coldplay will perform in January while Swift is slated to perform in March.
The Rotary International Convention will take place in late May 2024 which should see large group bookings for hotels, potentially lifting occupancy rates and RevPAR for OUECR’s hospitality segment.
Meanwhile, OUECR’s Singapore office committed occupancy stood at 96.1% as of 30 June 2023 and recorded a positive rental reversion of 8.1% for the second quarter of 2023.
Get Smart: DPU could see a rebound
It has been a painful two and a half years for OUECR as it grappled with the pandemic and doled out rental rebates to its tenants.
However, the REIT seems well-positioned for growth in 2024 and has spruced up two of its properties in anticipation of the recovery.
DPU could see a rebound as interest rates look to stabilise moving forward.
Is it a good time to buy into Singapore REITs? If you’ve thought about it, then our latest REITs guide will be an essential read. This exclusive pdf report shows you why REITs are still excellent assets, what sectors to look out for and how to find good REITs today. The info inside can help you build a solid retirement portfolio. Click here to download it for FREE.
Follow us on Facebook and Telegram for the latest investing news and analyses!
Disclosure: Royston Yang does not own shares in any of the companies mentioned.
