Brief Overview
OUE REIT reported 3Q26 gross revenue and net property income (NPI) growth of 3.0% and 4.6% year-on-year to S$72.6 million and S$30.3 million respectively, accounting for 27% of the FY26e forecast. The results were driven by strong hospitality segment performance, lower finance costs (down 12.4% year-on-year), and a S$1.6 million distribution contribution from the recently acquired Salesforce Tower associate. The hospitality segment revenue and NPI rose 12.6% year-on-year to S$30.3 million and S$27.6 million, with revenue per available room (RevPAR) increasing 8.2% year-on-year to S$302. Phillip Securities Research maintains its BUY recommendation with a lower DDM-based target price of S$0.43 (previously S$0.45), reflecting a 25-basis-point increase in the discount rate to account for a higher interest rate environment.
Investment Positives
Strong Hospitality Performance
The hospitality segment was the standout contributor in 3Q26, registering a 12.6% year-on-year increase in both revenue and NPI, to S$30.3 million and S$27.6 million respectively. RevPAR for the segment rose 8.2% year-on-year to S$302. Hilton Singapore Orchard posted a 7.5% year-on-year gain to S$315, underpinned by higher occupancy, targeted corporate account wins and resilient transient travel demand. Crowne Plaza Changi Airport saw an even stronger 10.0% year-on-year RevPAR increase to S$276. However, we do note that travel demand weakness persists in certain markets — notably Indonesia, where guests fell from approximately 20% of the origin mix to below 10%, and Japan, where arrivals remain down by about two-thirds from 2019 levels on a weak yen.
Falling Finance Costs
Finance costs declined 12.4% year-on-year to S$18.9 million. The weighted average cost of debt was stable at 3.6%, representing a 50-basis-point reduction year-on-year, while interest coverage improved to 2.9 times (from 2.8 times in 2Q26). Aggregate leverage of 42.1% is set to fall meaningfully to 37.1% on a pro forma basis if Crowne Plaza divestment proceeds are used to pare debt. OUE REIT also secured a new S$300 million unsecured revolving credit facility in July 2026, further strengthening its financial flexibility.
Upside Catalysts
We highlighted two key upside drivers: first, the accretive redeployment of divestment proceeds into a larger stake in Salesforce Tower (current stake: 19.9%); and second, the successful backfilling of approximately 100,000 square feet of space that Deloitte is returning at OUE Downtown in December 2026. OUE REIT is trading at a FY26e dividend yield of 6.2% and a price-to-net-asset-value of 0.57 times, suggesting significant value at current levels.
Investment Challenges
OUE Bayfront Share of Profits Drop
Distribution income from the OUE Bayfront joint venture fell 4.5% year-on-year to S$3.6 million. This decline followed A&O’s exit, as the tenant had occupied two floors at rents above the passing rent. Management expects existing tenants to expand into the vacated space over the next 12 to 18 months. The Level 17 conversion, which will create over 22,600 square feet of new prime office space, remains on track for completion in 1Q27.
Higher Interest Rate Risk
We raise the discount rate by 25 basis points to reflect a higher interest rate environment. With Australian core CPI elevated at 4% year-on-year, an RBA rate hike is considered likely. Additionally, any further debt taken to fund a larger stake in Salesforce Tower may push blended interest costs higher.
Outlook
Post divestments, management expects the portfolio contribution to settle at approximately 55% office, 30% hospitality and the remainder retail. At OUE Downtown, Deloitte has extended the lease for about a third of its space (49,000 square feet) to 4Q27. Rent on the extended space will increase from approximately S$8 per square foot to approximately S$9 per square foot, which smooths the backfill timeline. A co-working operator has signed a five-year lease in the high-S$8s per square foot, compared with Deloitte’s high-S$7s.
A significant office supply pipeline is expected in 2028, including Skywaters, Union Square and the Comcentre redevelopment. Management expects rents to moderate or stay flat in 2028–2029 and therefore aims to complete Deloitte backfilling before then.
The divestment process for One Raffles Place (ORP) has progressed to exclusive negotiations with a potential buyer, and due diligence is ongoing. However, there is no binding agreement yet, with the sale expected to conclude by 1Q27. ORP’s NPI yield is in the low-3% range for 2026, whereas Salesforce Tower’s NPI yield was approximately 5% at acquisition. Recycling ORP proceeds into a larger Salesforce Tower stake would therefore be yield-accretive.
Recommendation and Target Price
Phillip Securities Research maintains its BUY recommendation on OUE REIT. The target price has been lowered to S$0.43, from the previous S$0.45, based on a DDM valuation incorporating a 25-basis-point increase in the discount rate to reflect the higher interest rate environment.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
Frequently Asked Questions
Q: What is Phillip Securities Research's recommendation and target price for OUE REIT?
A: Phillip Securities Research maintains a BUY recommendation with a target price of S$0.43, lowered from the previous S$0.45.
Q: How did OUE REIT's hospitality segment perform in 3Q26?
A: The hospitality segment delivered a 12.6% year-on-year increase in both revenue and NPI, to S$30.3 million and S$27.6 million respectively. Segment RevPAR rose 8.2% year-on-year to S$302.
Q: Why was the target price lowered from S$0.45 to S$0.43?
A: We raised the discount rate by 25 basis points to reflect a higher interest rate environment, including elevated Australian core CPI and the likelihood of an RBA rate hike.
Q: What happened to OUE Bayfront's distribution income?
A: Distribution income from the OUE Bayfront joint venture fell 4.5% year-on-year to S$3.6 million, following A&O's exit from two floors that had been leased above passing rent.
Q: What is the current status of the One Raffles Place divestment?
A: The divestment process has progressed to exclusive negotiations with a potential buyer, with due diligence ongoing. There is no binding agreement yet, and the sale is expected to conclude by 1Q27.
Q: How have OUE REIT's finance costs changed?
A: Finance costs declined 12.4% year-on-year to S$18.9 million. The weighted average cost of debt was 3.6% (down 50 basis points year-on-year), and interest coverage improved to 2.9 times.
Q: What is the expected portfolio mix after divestments?
A: Management expects the portfolio contribution to settle at approximately 55% office, 30% hospitality and the remainder retail.
Q: What is the progress on backfilling Deloitte's space at OUE Downtown?
A: Deloitte has extended its lease for about a third of its space (49,000 square feet) to 4Q27 at higher rents. A co-working operator has signed a five-year lease in the high-S$8s per square foot. Management aims to complete backfilling before the heavy office supply pipeline arrives in 2028.
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