OUE Hospitality Trust - DBS Research 2016-11-01: Keep the faith

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Keep the faith

3Q16 DPU up 34% q-o-q to 1.23 Scts, in line with expectations.
Expect boost from acquisition of Crown Plaza Changi Airport extension and opening of new Michael Kors and Victoria Secret stores.
Delay in recovery of Singapore hospitality market to 2018 does not negate long term value.

As expected, 3Q16 DPU reported a 34% q-o-q improvement to 1.23 Scts as OUEHT benefited from the acquisition of 243-room Crown Plaza Changi Airport extension (CPEX) as well as an improvement in occupancy at Mandarin Gallery upon opening of the Michael Kors store.
Nevertheless, 3Q16 DPU fell 28% y-o-y on account of the dilution arising from the S$239m rights issue (441.9m units at S$0.54) earlier this year to fund the acquisition of the Crown Plaza Changi Airport extension (CPEX).

Net property income (NPI) contribution from the hotel segment rose 5% y-o-y owing to completion of the acquisition of CPEX in August.
However, Mandarin Orchard Singapore (MOS) reported a 3% dip in NPI as it suffered a 8% y-o-y decline in RevPAR to S$224 on the back of a generally weak Singapore market which continues to be impacted by excess supply and dampened corporate demand.

Mandarin Gallery delivered 22% q-o-q improvement in NPI. This is largely on account of effective occupancy rising to 89% from 79% in 2Q16, upon the opening of the Michael Kors store. On a y-o-y basis, earnings from the retail segment was still down 6% as occupancy was higher at 95.7% in 3Q15 and the effective rent per square foot per month fell to S$24.60 from S$25 in the prior year.
Over the quarter, OUEHT also reported that for 3.9% of net lettable area (NLA) that was renewed, base rents fell 34%. This is partially a function of the weaker retail environment as well as the decision to adopt a lower base rent but compensated with higher turnover rent component.
Nevertheless, there as some signs of stabilisation with passing rents at the mall flat q-o-q. In addition, we understand based on discussions with potential tenants, effective occupancy at Mandarin Gallery could rise above 90% by end 4Q16.

Following the rights issue in April and the acquisition of Crown Plaza Changi Airport extension (CPEX) in August, gearing settled at 37.3%.
Over the quarter, OUEHT also reported a S$1m decline in the value of CPEX largely due to the total purchase consideration inclusive of transaction costs being slightly lower than the latest valuation of S$205.6m.
Average costs of debt declined to 2.5% from 2.7% in the prior quarter on the back of recent refinancing which also resulted in the proportion of fixed rate debt dropping to 68% from 90% previously.
NAV per unit was stable at $0.80.

After incorporating a delay in the recovery of the Singapore hospitality market to 2018 from 2017 previously and weak October 2016 (RevPAR for overall Singapore market reportedly fell close to 15% y-o-y), we now project RevPAR for MOS to fall 6% and 4% for FY16 and FY17 respectively, partially offset by lower assumed interest rates given recent refinancing and draw down of income support associated with the CPEX acquisition. Thus, we cut our FY16-17F DPU by 1-6%.
On the back of lower assumed earnings, we also reduced our DCF-based TP to S$0.72 from S$0.75.

Despite revising down our near term DPU estimates, we believe OUEHT will be able to grow its FY17F DPU by 5%. This is underpinned by
1. rebasing of its DPU in 2016 post its recent rights issue,
2. full year contribution from the acquisition of CPEX,
3. increased contribution from Mandarin Gallery as 2016 was affected by fit period for the new Michael Kors and Victoria Secret stores
4. drawdown of S$7.5m worth of income support available from the acquisition of CPEX.

While the Singapore hospitality market is likely to remain weak near term and industry news flow potentially to be negative, we believe OUEHT offers a unique proposition as one of the few SREITs that is expected to deliver DPU growth in the coming year, following the medicine it took in the form of a rights issue in 2016. Thus, we maintain our BUY call with a revised TP of S$0.72

Melvin SONG CFA | Derek TAN | http://www.dbsvickers.com/ 2016-11-01

SGX Stock Analyst Report BUY Maintain BUY 0.72 Down 0.750