OUE Hospitality Trust - CIMB Research 2018-01-02: Mandarin Orchard Singapore To Power Ahead

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Mandarin Orchard Singapore To Power Ahead

We believe continued improvements from Mandarin Orchard Singapore (MOS) and lower interest costs could offset the absence of income support for Crowne Plaza Changi Airport (CPCA) and sluggish Mandarin Gallery (MG).
We expect occupancy for CPCA to improve from 75% in FY17F to 85% in FY18F. CPCA’s room rates could only move up when occupancy reaches the high-80%.
OUEHT refinanced total debt outstanding in Dec 2017, resulting in all-in cost of debt to come down by c.40bp, representing S$3.4m absolute cost savings. Maintain Add with a higher TP.

Downside risks could include a slower-than-expected recovery in the Singapore market and unfavourable acquisitions.

Mandarin Orchard Singapore achieved 3.2% yoy improvement for its 9M17 RevPAR, reflecting its market leadership along the Orchard Road belt. From a base-effect perspective, we expect the hotel to register its third consecutive quarterly yoy improvement in RevPAR.

For FY18F, we now project 4% yoy improvement in Mandarin Orchard Singapore’s RevPAR, driven by a corresponding rise in ARR as we expect occupancy for FY18F to remain in the high-80%.
For FY19F, we expect a 6% yoy increase in RevPAR, driven by a 4% rise in ARR and 2% pts yoy increase in occupancy.
By our estimate, Mandarin Orchard Singapore’s ARR would have climbed to S$276 by FY19F, surging past FY14’s high of S$263.

With the opening of T4 in Nov 2017, we expect occupancy for Crowne Plaza Changi Airport to improve from 75% in FY17F to 85% in FY18F. However, we believe that FY18F ARR would remain flat until occupancy reaches the high-80%. Accordingly, we project 13% yoy improvement in RevPAR for FY18F.
Driven by a further increase in occupancy (92%) and ARR (+5% yoy) in FY19F, we expect another 14% yoy increase in FY19F RevPAR. We project that CPCA would achieve the target rent of S$29m-30m p.a. by FY21F.

We slightly temper our expectations for Mandarin Gallery, and assume that Mandarin Gallery’s contributions would stay at S$25m-26m in NPI.
Mandarin Gallery continues to suffer from high negative rental reversion, registering c.-18% for 9M17 for 19.6% of NLA. 19% of GRI would be up for renewal in FY18F. Additionally, we note that CPCA has fully drawn down in income support in 3Q17.
Nonetheless, we project 1% yoy DPU growth for FY18F, as we expect Mandarin Orchard Singapore contributions and lower interest costs to offset the absence of income support and sluggish Mandarin Gallery.

On 19 Dec 2017, OUEHT completed the refinancing of its total outstanding debt totaling S$859m ahead of their respective maturities.
Prior to the refinancing, S$294m was due in Jul 2018; S$270m due in Jul 2019; S$295m due in Jan 2020. Following the refinancing, no loans are due until Dec 2020.
Further, the average all-in cost of debt has decreased to 2.4% p.a. from 2.8% previously; weighted average debt maturity has been extended from 1.3 years to over 3.7 years and more than 70% of the REIT’s interests has been hedged.

We decrease our FY17F DPU by 0.7% due to lower Mandarin Gallery contributions, but increase our FY18F-19F DPU by 1.1-1.2% on higher MOS and CPCA contributions, as well as lower interest expenses.
Our DDM-TP is also bumped up with higher LTG of 2.5% (prev 2%). Our TP implies 6.1% FY19F yield and 1.17x current P/BV.
ADD maintained with projected returns of c.11% for 2018F.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-02

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