SG Hospitality - OCBC Investment 2017-02-08: OUEHT is our pick

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Singapore Hospitality Sector Singapore REIT OUE HOSPITALITY TRUST SK7.SI CDL HOSPITALITY TRUSTS J85.SI FAR EAST HOSPITALITY TRUST Q5T.SI ASCOTT RESIDENCE TRUST A68U.SI GLOBAL PREMIUM HOTELS LIMITED P9J.SI

SG Hospitality - OUEHT is our pick

• FY16 ended with RevPAR/U declines.
• Global economic sentiment key in 2017.
• OUEHT top pick within hospitality.

Full-year RevPAR/REVPAU decline 

• Three out of four of the hospitality REITs under our coverage – Ascott Residence Trust (ART), CDL Hospitality Trusts (CDLHT) and OUE Hospitality Trust (OUEHT) – have announced their FY16 results, while Far East Hospitality Trust (FEHT) will be announcing theirs before trading hours on 22 Feb. 
• In terms of full-year RevPAR growth for Singapore-based hotels, CDLHT and OUEHT posted 8.6% and 5.7% declines respectively. Full-year RevPAU growth for ART came to 3.0% decline.
• Similarly, 4Q RevPAU/RevPAR YoY growth came to -0.6% for ART, -10.5% for CDLHT, and -6.8% for OUEHT’s Mandarin Orchard. 
• We note that Frasers Hospitality Trust (not under coverage) bucked a trend with a 6.1% YoY increase for its 1Q17 RevPAR for Fraser Suites and InterContinental Singapore (ICSG), mainly due to a full room inventory in ICSG as compared to 1Q16 when some rooms were taken out of operation due to renovation.

2017 is an odd-numbered year, but not too much of a concern 

• As odd-numbered years tend to have fewer MICE and large-scale sporting/entertainment events, it has often been cited as a reason for YoY RevPAR declines (if any) during those years. 
• Yet, beyond anecdotes of hotels being able to charge higher room rates during certain events, it is tough to see an obvious trend in the data showing better operational performance during even-numbered years. 
• While a relative dearth of events will not help the tough operating situation we expect this year, we believe that the other factors driving demand – especially global economic sentiment – are much more significant. The growth in hotel supply room, which is expected to be ~6% this year, is also a key consideration going forward.

Maintain NEUTRAL on the sector 

• Going by FY16 NPI, hospitality REITs are trading at implied cap rates (or NPI over market capitalization and net debt) of 5% to 6%, without making any adjustments for the less-than-full-year contribution from ART’s Sheraton Tribeca New York Hotel and OUEHT’s Crowne Plaza Changi Airport extension. 
• Our top pick is OUEHT [BUY; FV: S$0.75], as we expect it to be buffered by inorganic contributions from its recent acquisition. 
• We maintain NEUTRAL on the sector.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-02-08

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 0.750 Same 0.750

HOLD Maintain HOLD 1.460 Same 1.460

HOLD Maintain HOLD 0.620 Same 0.620

HOLD Maintain HOLD 1.220 Same 1.220

HOLD Maintain HOLD 0.310 Same 0.310