OUE Hospitality Trust - RHB Invest 2016-11-01: Nothing To Cheer About

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Nothing To Cheer About

We downgrade OUEHT to NEUTRAL as we expect its hotel RevPAR to be negatively impacted by weakening corporate demand amid competitive pressures stemming from incoming hotel supply.
We also expect the challenging retail market along Orchard Road to impact MG’s upcoming renewal of leases.
Still, its share price is likely to be supported around the current levels as it offers a relatively high forward yield of 7.4%.

With the outlook for demand weakening and 3,857 new hotel rooms (~6% of inventory) anticipated to be open in 2017, we expect revenue per available room (RevPAR) to continue declining until end-2017.
RevPAR for Mandarin Orchard Singapore (MOS), which accounted for 63% of total NPI in 3Q16, declined 8% YoY on the back of weak corporate demand and supply pressures. The impact to OUE Hospitality Trust’s (OUEHT) earnings, however, would be mitigated by master leases and minimum rent guarantees in place.
In August, it completed the acquisition of the Crowne Plaza Changi Airport extension (CPEX) which comprises 243 rooms, and full contributions are scheduled to kick in from 4Q16 onwards.

Mandarin Gallery (MG) has c.2%, 19% and 23% of leases expiring by gross rent in 4Q16, 2017 and 2018 respectively. As the expiring leases were likely signed during a peak period (2013/2014), along with challenging retail conditions especially along Orchard Road, we expect to see negative rent reversions ahead.
MG’s occupancy improved 10ppt QoQ to 89% in 3Q16, with Michael Kors moving in. Another new tenant, Victoria’s Secret, is expected to move in during the current quarter – taking the occupancy rate closer to 95%. Overall effective rentals declined 1.6% YoY in 3Q16.

With new hotel rooms supply looming in 2017 and demand factors softening, we see very little near-term catalysts.
The downside is, however, limited as the stock offers a healthy FY17F yield of 7.4%.
We tweak our earnings forecast, and our TP dips to SGD0.70 to reflect the effects of the rights issue and acquisition of CPEX in August.
Our DDM-based TP assumes a COE of 8.5% and terminal growth rate of 2%.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2016-11-01

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