OUE Hospitality Trust - RHB Invest 2017-11-02: Flying Higher With New Terminal Opening

OUE Hospitality Trust - RHB Invest 2017-11-02: Flying Higher With New Terminal Opening OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Flying Higher With New Terminal Opening

  • OUE Hospitality Trust (OUEHT)'s 3Q results were in line. There was noticeable improvement in both hotels’ performances, with RevPAR growth driven by both occupancy and room rates. 
  • With the opening of the new airport terminal and corporate demand pick-up, we expect the hotels to clock in a much stronger performance next year. The gradual tapering of hotel supply should also provide an additional boost. 
  • Mandarin Gallery (MG) occupancy has been improving steadily, mitigating the weakness from negative rent reversions. 
  • We maintain BUY, with a higher TP of SGD0.88 (from SGD0.83, 9% upside).

Both hotels showing improved performance metrics. 

  • Mandarin Orchard Singapore’s (MOS) revenue per available room (RevPAR) grew a better-than- expected 8% YoY, aided by both higher occupancy and room rates. 3Q17 occupancy came in close to mid-90% levels from high 80% last quarter, and OUE Hospitality Trust (OUEHT) was able to increase room rates on the back of higher demand. Management noted that all the market segments (transient, corporate and wholesale) saw improved demand. The food & beverage (F&B) segment also performed better, in tandem with higher occupancy.
  • At Crowne Plaza Changi Airport (CPCA), occupancy improved to the 80% range compared to mid-70% last quarter and the 60% range last year. With the successful opening of Changi Terminal 4 (31 Oct) and limited hotel supply in the area, we anticipate demand to improve strongly in coming quarters and expect occupancy to reach close to 90% levels next year. The higher RevPAR growth should help to more than offset the lack of income support for the hotel, which has been fully drawn down. 
  • Overall, we are expecting RevPAR for both the hotels to increase by 3%-7% next year.

Retail – commendable performance despite challenges. 

  • Committed occupancy at Mandarin Gallery (MG) improved to 94.7% (+0.7ppt QoQ, +5.7ppts YoY), despite the challenging outlook. There were also more pop-up stores, which pushed the average occupancy for the quarter to 96.4%. Rental reversion for base rent was -19%, as the expiring rents were likely signed during the peak of the market. It’s also to be noted that OUEHT has been moving towards a higher variable rent structure for its new leases, thus the effective negative rent reversions are lower.
  • Looking ahead, about 5% and 19% of leases (as a percentage of gross rent) are due for renewal in FY17F-18F respectively, for which we expect negative rental reversions of ~5-10%. The impact of negative rental reversions is expected to be mitigated by higher occupancy in the mall.

Maintain BUY with higher TP of SGD0.88. 

  • We have adjusted our FY18F- 19F DPU higher by 1-3%, by fine-tuning our RevPAR assumptions. We have also lowered our CoE assumption by 10bps to 7.2% in our DDM model, to better reflect the current low-interest environment. 
  • The stock offers FY17F-18F yields of 6.3% and 6.4% respectively. 
  • Key risks to our forecasts would be lower-than-expected pick-ups in visitor arrival and weaker corporate demand.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-11-02
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.88 Up 0.830