- OUE REIT's DPU for 1H25 rose 5.4% y-o-y to S$0.98, in line with our expectations and forming 50% of our FY25e forecast. The improvement was driven by a 17.3% y-o-y drop in financing costs, which offset the income vacuum from the divestment of Lippo Plaza and a 12.9% decline in hospitality segment revenue.
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- Cost of borrowing is expected to decline further by ~0.2ppts in 2H25 (1H25: 4.2%), and we see potential DPU upside from refinancing and loan repayment. Assuming full repatriation of proceeds (~S$313.2mil) from the Lippo Plaza divestment is used to pare down debt, OUE REIT's gearing would fall to 37.2%, resulting in ~14% savings in interest expense in FY26e.
The Positives
Strong performance from the Commercial segment.
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- We expect office rental reversion to remain in the mid-single digits in FY25e, supported by sustained flight to quality. Near-term supply pressure has eased, with 85% of IOI Central Boulevard Towers now occupied.
- The high retail rental reversion in 1H25 was driven by the low base rents signed during the COVID period. Tenant sales remain at ~80% of pre-COVID levels, with luxury brands underperforming while F&B continues to contribute more meaningfully. OUE REIT is taking a more proactive approach to boost footfall, including initiatives like the Popmart collaboration.
- Retail rental reversion is projected to stay in the high single digits in FY25e, supported by below-historical-average new supply in the CBD area.
DPU upside from savings in finance expenses.
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