OUE Hospitality Trust - RHB Invest 2018-01-03: Early Refinancing Provides Another Boost

OUE HOSPITALITY TRUST SK7.SI

OUE Hospitality Trust - Early Refinancing Provides Another Boost

Early refinancing of OUE Hospitality Trust (OUEHT)’s debts would result in interest savings and uplift DPU by 2-3%. This places it in good shape ahead of the expected interest rate hikes.
The REIT is also a primary beneficiary of the rebound in the hospitality segment with SG Hospitality expected to see 3-7% RevPAR growth in 2018. Key catalysts ahead would be higher corporate demand from more events in 2018, tapering of hotel supply and Changi Airport’s continued rise as a regional travel hub.

OUE Hospitality Trust (OUEHT) announced on 19 Dec that it has refinanced SGD859m worth of debt expiring over the next three years. The average cost of debt post refinancing would be 2.4%, or 40bps lower than the current interest cost of 2.8% and should result in finance cost savings of SGD3-4m pa. Over 70% of the debt would be fixed.
With no loans expiring until Dec 2020, the early refinancing puts it in a good position ahead of the potential interest rate hikes in the near-term.

Passenger movements are up 6.3% YTD (Nov 2017) while SG visitor arrivals rose 5.1% for 9M17. The opening of Terminal 4 (T4) on 31 Oct increased passenger handling capacity by ~25%. With a higher capacity, we expect airlines to add new destinations and increase flight frequencies, which in turn should drive passenger growth and visitor arrivals.
One of the beneficiaries of this growth is OUEHT’s Crowne Plaza Changi Airport Hotel (CPCA), the only hotel located in the airport’s premises. While rental support expiry would have a slight negative impact, we expect this to be offset by organic revenue per available room (RevPAR) growth.

As OUEHT’s key asset, it is showing improved performance metrics with RevPAR up 8% YoY in 3Q17. The better performance was driven by both higher occupancy and better room rates. More importantly, there was broad demand improvement across all market segments (transient, corporate and wholesale).
Looking ahead, the continued demand growth along with lower hotel room supply is expected to result in a RevPAR growth of 3-7% in 2018.
With a higher room demand, the food & beverage (F&B) segment is also expected to see a 5-10% growth.

Mandarin Gallery’s (MG) committed occupancy remains healthy at 94.7% despite a challenging retail climate. Rent reversions have been in negative territory (10-20%) over the last few quarters. It was mainly due to the expiry of rents signed when the market peak in 2013-2014.
Also, OUEHT has been moving towards a higher variable rent structure for its new leases thus the effective negative rent reversions are lower.
Looking ahead, there is minimal retail supply pipeline in the Orchard area. The lower supply combined with government initiatives to spruce up the retail scene should limit downside risks.

We adjust our FY18F-19F DPU higher by 2-3%, factoring in the interest cost savings. Our DDM-derived TP is based on a COE of -7.2% and 2% terminal growth.
The stock offers FY18F-19F yield of 6.2% and 6.6% respectively.
Potential upside could arise from stronger-than-expected growth in visitor arrivals and better corporate segment demand.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-03

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