SINGAPORE (Nov 3): CIMB is lowering OUE Commercial REIT FY18-19’s DPU estimates slightly to factor in the additional debt as well as relook its forward rental growth assumptions.

To recap, OUE CT reported a 2.1% decline in 3Q17 revenue to $43.3 million while distribution income came in 3.4% higher y-o-y at $17.8 million, helped by the absence of manager’s performance fees and higher income support drawdown.

However, DPU of 1.15 cents was 13% lower y-o-y due to dilution from the private placement done in March this year.

“For the 9M, DPU of 3.53 cents made up 70% of CIMB’s FY17 forecast, slightly below expectations,” says analyst Lock Mun Yee.

Although office portfolio occupancy improved to 97% in 3Q, topline slipped due to lower retail rental income at One Raffles Place as occupancy was hit by asset enhancement.

As a result, retail revenue made up a smaller 14% of total revenue. The weakness was partly offset by improvement in One Raffles Place office occupancy to 97.3% although the latter contributed a smaller 42.6% of total revenue.

However, the slack was partly picked up by OUE Bayfront. Although takeup dipped 98.2% in 3Q, it was still above industry average of 92.5%.

Lippo Plaza continued to enjoy full occupancy while average passing rent expanded to RMB9.86psm/day ($2.03psm/day) in 3Q. The property has 29.8% of its income due to expire in FY18. We anticipate a positive uplift when these leases are renewed.

As at end 3Q, OUECT’s aggregate leverage ticked up slightly to 36.9%. The trust issued its maiden $150 million fixed rate notes in Sept 17 and announced plans to redeem $75 million of CPPUs (Convertible Perpetual Preferred Units) in Oct 17 to mitigate future dilution in DPU from conversion of the CPPUs into units. Post redemption, aggregate leverage is projected to increase to 38.8%.

“Maintain Hold with a DDM-based TP of 68 cents,” says Lock.

Units in OUE CT are trading at 72 cents with a FY17 dividend yield of 6.58%.