OUE Hospitality Trust - DBS Research 2017-05-05: Michael, Victoria and Changi arriving

OUE Hospitality Trust - DBS Vickers 2017-05-05: Michael, Victoria and Changi arriving OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Michael, Victoria and Changi arriving

  • 1Q17 DPU up 18% y-o-y, above expectations.
  • Boost from acquisition of Crown Plaza extension and opening of Michael Kors and Victoria's Secret stores.
  • Turnaround to continue to trigger further stock rerating.

Boost from timely acquisition. 

  • We reiterate our BUY call with a revised TP of S$0.76. 
  • While we now expect a recovery in the Singapore hospitality market to only occur in 2018 instead of 2017, OUE Hospitality Trust (OUEHT) is one of the best-positioned hospitality REITs to ride out near term headwinds. 
  • In fact, through the rebasing of its DPU in FY16 and its timely acquisition of Crown Plaza Changi Airport extension (CPEX) OUEHT should still deliver healthy 5% growth in DPU in 2017.

Multiple levers to pull to drive earnings in 2017. 

  • We expect Mandarin Orchard Singapore (MOS) to report a 4% decline in revenue per available room (RevPAR) in FY17. However, we believe DPU growth is still achievable in 2017. This is underpinned by full year contribution of CPEX, draw down of S$7.5m income support for CPEX, as well as increased contribution from Mandarin Gallery following the opening of the Michael Kors and Victoria’s Secret stores in 2H16 despite projecting negative rental reversions of c.20%.

Turnaround on track Recovery in 1Q17 DPU better than expected

  • 1Q17 DPU rose 18% y-o-y to 1.30 Scts. 
  • While we had expected a recovery due to the low base effect as result of the impact of the rights issue and lower occupancies at Mandarin Gallery in 1H17, the reported DPU was stronger than expected due to lower interest expenses.
  • Underlying net property income (NPI) rose 4% y-o-y as OUEHT benefited from the acquisition of the Crown Plaza Changi Airport extension (CPEX) as well as the opening of the Michael Kors and Victoria’s Secret stores in 4Q16.

Strong contribution from Crown Plaza Changi but hotel still ramping up

  • The overall 1Q17 NPI for Crown Plaza Changi rose 21% y-o-y to S$4.1m. However, due to the property still ramping up its occupancy, no variable rent was earned, with Crown Plaza Changi collecting its fixed rental income from the master lease. 
  • Over the quarter, OUEHT also drew down S$1.6m worth of income support. As part of the agreement to acquire the original Crown Plaza Changi and its extension, OUEHT was entitled to S$7.5m worth of income support that could be drawn down over a three-year period. Thus far, the trust has received c.S$4.2m.

Turnaround at Mandarin Gallery

  • As expected Mandarin Gallery recovered with 1Q17 NPI rising 18% y-o-y to S$6.4m. 
  • The turnaround in performance was on the back of an improvement in occupancy (94.7% versus 82.9% in 1Q16) and absence of rent free period. Effective occupancy was depressed in 1H17 due to the refit of the new Victoria’s Secret and Michael Kors stores which subsequently opened in 4Q16.
  • Meanwhile, the effective rent for the mall dropped to S$23.70 per sqft per month from S$24.40 in 1Q16 on the back of the negative rental reversions reported over the prior quarters. 
  • Nevertheless, there was a slight q-o-q improvement from the S$24.60 reported in 4Q16. In addition, on a same-store basis, we understand tenant sales have improved by c.2% y-oy.
  • The negative rental reversions trends also continued into 1Q17 with 4.5% of leases by net lettable area (NLA) renewed, having their base rent fall by 19%. However, this is in line with prior guidance of 15- 20% fall in base rents given the more challenging retail environment in Singapore. This downward pressure is expected to persist for the 15% of leases (by NLA) up for renewal in the remainder of FY17.

Mandarin Orchard Singapore weak as expected

  • NPI for Mandarin Orchard Singapore (MOS) was down 3% y-o-y as expected. The decline was mainly attributed to a 2% y-o-y drop in RevPAR (primarily due to a fall in room rates) as the Singapore market continues to face an oversupply situation. However, the fall in room revenues was partially mitigated by higher F&B revenues.

Stable gearing

  • Gearing remained stable at 38% with average cost of debt at 2.5%.
  • The proportion of fixed rate debt was also steady at 69% with no loans due until July 2018.
  • NAV per share dropped marginally to S$0.76 from S$0.77 in 4Q16, as a result of the payment of the last quarters distribution.

Marginal uptick in FY17-18F DPU estimates

  • On the back of the better than expected 1Q17 results, we raised our FY17-18F DPU by 1%. 
  • We have lowered our interest expense assumptions which were partially offset by lower contributions from Crown Changi Plaza.
  • As a consequence of higher earnings, we also lifted our DCF-based TP to S$0.76 from S$0.75.

Turnaround to be sustained

  • Over the coming few quarters, we expect OUEHT’s turnaround to be sustained largely due to higher earnings at Mandarin Gallery (higher effective occupancies post the opening of the Michael Kors and Victoria’s Secret stores) and full year contribution from the enlarged Crown Plaza Changi.
  • This should offset the drop in earnings from MOS due to an expected decline in RevPAR.

Maintain BUY with revised TP of S$0.76

  • With OUEHT expected to deliver a recovery in DPU and offering close to 13% total return over coming 12 months, we maintain our BUY call with a revised TP of S$0.76.

Overhang removed. 

  • OUEHT’s share price corrected over the past year due to the overhang from 
    1. capital raising to fund the acquisition of CPEX, and 
    2. gearing that was over 40%.
  • However, these concerns have now been addressed, following the recent rights issue which resulted in OUEHT’s gearing falling to c.38%.

Key Risks to Our View

  • Competitive landscape. The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality market. 
  • In addition, rents at Mandarin Gallery may fall below expectations if there is a significant deterioration in the Singapore retail scene

Mervin Song CFA DBS Vickers | Derek Tan DBS Vickers | http://www.dbsvickers.com/ 2017-05-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.76 Up 0.750