OUE Hospitality Trust - CIMB Research 2018-01-31: 4Q17 Can We Extend The Check-out Time Please?

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - 4Q17: Can We Extend The Check-out Time Please?

OUE Hospitality Trust's FY17 DPU of 5.14 Scts (+11.5% y-o-y) was in line with consensus and our expectations at 102% of our full-year estimate. 4Q17 DPU of 1.27 Scts (-6.6% y-o-y) was at 25%.
We are heartened by Mandarin Orchard Singapore (MOS) registering its third consecutive quarter of y-o-y RevPAR improvement. We expect MOS to achieve 5% gain in RevPAR to S$235 for FY18F.
Crowne Plaza Changi Airport (CPCA) continues to clock up strong operational performance, with RevPAR improving 32% y-o-y to S$176. We forecast CPCA to earn above the minimum rent in FY18F.
What was also a positive surprise to us was the 3.8% positive rental reversion at Mandarin Gallery (MG). We believe that average expiring rents are, at last, converging with market rents.

Reiterate ADD with a higher DDM-based Target Price.
Downside risks could include a slower-than- expected recovery in Singapore hotels and unfavourable acquisitions.

4Q17 DPU declined 6.6% y-o-y, due mainly to the absence of income support (fully drawn down in 3Q17). Hotel revenue grew 3% y-o-y due to Mandarin Orchard Singapore (MOS), which registered its third consecutive quarter of RevPAR improvement.
Due to the effect of refinancing total outstanding debt of S$859m, financing expenses jumped over 1.5x. S$5.1m was due to unwinding of interest rate swap which was taken at capital; S$3.1m due to write-off of unamortised debt-related transaction costs (non-cash in nature).

MOS 4Q17 RevPAR grew 2% y-o-y to S$225 (4Q16: S$220). The improvement was driven by an increase in ARR (average room rate) as average occupancy decreased to mid-80% in the quarter (4Q16: high-80%).
FY17 RevPAR grew 3% to S$223 (FY16: S$217) on higher ARR and occupancy.
For FY18F, we expect MOS to continue to outperform and achieve 5% gain in RevPAR to S$235 (mainly led by increase in ARR).

4Q17 master lease income from Crowne Plaza Changi Airport (CPCA) was the same as 4Q16 at minimum rent (S$5.6m per quarter). Nonetheless, RevPAR for CPCA improved 32% y-o-y to S$176 (4Q16: S$133) as occupancy ramped up from low-60% in 4Q16 to mid-80% in 4Q17.
We continue to expect improvements from CPCA as the asset matures, forecasting CPCA to earn above the minimum rent in FY18F. However, we project that CPCA would achieve the target rent of S$29m-20m p.a. by FY21F.

What was a positive surprise to us was the 3.8% positive rental reversion at Mandarin Gallery (MG) in 4Q17 (for c.7% of NLA), after seven consecutive quarters of negative reversions.
The positive reversion was due to F&B tenants, which are doing relatively well. 16% of rental income is up for renewal in FY18F. Of which, two-thirds of the renewals will be in 4Q18 and “quite a bit” (as quipped by the manager) of them will be from F&B tenants. Hence, we expect reversions for FY18F to be mildly positive.

We anticipate that higher contributions from both MOS and CPCA, a relatively more stable MG (at least no further deep negative reversions expected in FY18F) and lower finance expenses (all-in cost of debt to decrease by 40bp to 2.4% p.a. or c.S$2.5m cost savings) would more than offset the absence of income support in FY18F.
We increase our FY18F-19F DPU by 1.6%; we project a 0.6% y-o-y increase in FY18F DPU. Reiterate ADD with a slightly higher DDM-based Target Price (S$0.92); we project 10% total returns for 2018F.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-31

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.92 Up 0.890