OUE Hospitality Trust - CIMB Research 2016-05-09: Positive RevPAR but retail bogged down

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Positive RevPAR but retail bogged down

At 18% of our full-year forecast, 1Q16 DPU of 1.10 Scts (-26% yoy) missed consensus and our expectations.
The negative deviation stemmed from lower retail revenue and higher weighted average of units, following the completion of a rights issue on 13 Apr.
Encouragingly, hotel RevPAR inched up 0.9% yoy to S$229. Retail was bogged down by fit-outs but is positioned for growth from 2017 onwards.

Maintain Hold, with a higher DDM-based target price. With growth drivers emerging towards the end of the year, we could revisit the stock then.

Gross revenue was higher 3% yoy at S$30.1m as higher hospitality revenue (+11% yoy) offset lower retail revenue (-16% yoy).
Master lease revenue from Mandarin Orchard Singapore (MOS) was 1% higher yoy as higher F&B offset muted corporate demand.
Interestingly, the Manager pushed for higher ADR (Average Daily Rate) at MOS (c.+4% yoy), reflecting its market leadership on the Orchard Road belt and its strategic focus on guests who desire to stay in the city-state’s premier shopping area.

As a result, occupancy for MOS dropped to low-80s (from mid-80s).
Overall, RevPAR for MOS was flat yoy at S$222. Meanwhile, revenue from Crowne Plaza Changi Airport (CPCA) jumped 48% yoy due to full-quarter contributions.
Occupancy for CPCA remained strong (above 90% vs. industry average of 85.7% for upscale segment) as the hotel saw higher demand from the transient segment. Correspondingly, RevPAR for CPCA rose 2.4% yoy to S$252.
Overall, hotel RevPAR inched up 0.9% yoy to S$229.

Retail revenue pertaining to Mandarin Gallery (MG) fell 16% yoy due to fit-outs for incoming tenants - Michael Kors (MK) and Victoria’s Secret (VS). As at end-1Q, 13% of MG’s NLA was undergoing fit-outs.
1Q16 average occupancy was 83% vs. committed occupancy of 88% while average effective passing rent for 1Q16 was S$24.4 psfpm (1Q15: S$24.6 psfpm).
Due to a higher GTO component and lower base rent, the average rental reversion for leases signed in 1Q was 19% lower yoy (for c.5.8% of NLA).

MK (which will occupy c.5% of MG’s NLA) and VS (10% of NLA) are expected to open their flagship stores in 3Q16 and 4Q16, respectively. Collectively, the duo account for 30% of retail revenue.
Furthermore, MK and VS have signed seven- and 10-year leases, respectively, which will add income stability to MG.
Lastly, we expect signed rents for MK and VS to be higher than passing rents as the leases were signed in 2015.
Then, 50% of the mall’s NLA achieved rental reversion of +8.6%.

With the changes in our forecasts (refer to overleaf), our DDM-based target price is raised to S$0.71.
Given that growth drivers will only emerge towards the end of the year and that subsequent quarters will be subdued, we maintain Hold on the stock.
We could revisit OUEHT towards the end of the year.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-05-09

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.71 Up 0.67