OUE HOSPITALITY TRUST
SK7.SI
OUE Hospitality Trust - Catalysts In Sight, Results In-Line
- OUE Hospitality Trust's(OUEHT) 1Q17 DPU of 1.3 cents (+18.2% YoY) were in-line accounting for 26% of our full-year forecasts.
- We maintain our BUY recommendation and DDM-derived TP (CoE: 7.8%, Tg: 2%) of SGD0.76.
Highlights
- 1Q17 Gross Revenue and NPI increased 6.4%/4.3% YoY respectively driven by acquisition of Crowne Plaza Changi Airport's Extension (CPEX) and higher retail contribution. NPI margins declined 1.7ppt to 85.5% mainly due to the higher property expenses from acquisition of CPEX.
- OUEHT also drew-down SGD1.6m from the income support provided for CPEX as the hotel is still ramping up.
- On the hospitality front, Mandarin Orchard Singapore (MOS) RevPAR declined 2.3% YoY to SGD217. RevPAR decline was driven by lower ADRs due to increased competition and absence of air show and other events held in 1Q16. Hotel occupancy however inched up around 4ppt to 89% on the back of increased demand.
- Occupancy at enlarged Crowne Plaza Changi Airport (CPCA,563 rooms) has been slowly ramping up and is currently in the mid-70% levels, compared to ~60% during acquisition (Aug 2016). However, this is still well below peak occupancies(~90%) before acquisition and completion of CPEX.
- Mandarin Gallery (MG) NPI increased 17.6% YoY in 1Q17 on the back of improved occupancy levels to 94.7% (1Q16:82.9%). Key new tenants that moved in end of last year includes Michael Kors and Victoria's Secret. Management noted that tenant sales (on a same-store basis) has seen some improvement in 1Q17 which is positive sign amid challenging retail market.
- MG rent reversion for the quarter remained weak (-19% decline in base rents for 4.5% of NLA signed). Management has been selectively adopting a higher variable rent structure to counter the retail market challenges. About 12% of leases in MG are pending renewal this year for which we expect negative rent reversions of 5-15%.
- Gearing remains unchanged at 38.1% with average borrowing costs of 2.5%. OUEHT has hedged 100% of floating rate loans in April which is expected to slightly increase the borrowing costs by 10-20bp.
Our Take
- Going forward, the key catalyst for OUEHT is the opening of new Changi Airport Terminal-4 in 2H17. With CPCA being the only hotel in the airport premises it should be a key beneficiary from the higher passenger flow (esp. transit passengers) and airline crew. Thus we see a good scope for occupancy increase to low - 80's in 2H17 from mid-70% currently.
- OUEHT should also benefit from the tapering of hotel supply in 2018 which should arrest the decline in ADR's. Only 69 hotel rooms are expected to come on-stream in 2018 compared to 3,767 rooms this year based on Howrath HTL and CDL Hospitality Trust's research data.
- While MG is likely to see some impact from the weak retail climate the current high occupancies and improved tenant sales mitigates the downside risk.
- The stock currently offers an attractive FY17/18F yields of 7%/7.2% respectively which we deem as highly attractive. We will be hosting an investor luncheon on 11th May and will publish a detailed note after that.
Vijay Natarajan
RHB Invest
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http://www.rhbinvest.com.sg/
2017-05-05
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