OUE HOSPITALITY TRUST
SK7.SI
OUE Hospitality Trust - In A Sweet Spot
- OUE Hospitality Trust (OUEHT)’s two hotels registered better performance metrics, on the back of improving sector outlook. With supply tapering and demand factors in place, 2018 looks to be a promising year for the hospitality sector.
- Mandarin Gallery surprised positively, as its occupancy rate rose and rental rates grew in 4Q17 despite a challenging retail environment. Lower financing costs from its recently-completed refinancing exercise would be another boost to its outlook.
- BUY, with a SGD0.95 Target Price (from SGD0.91, 7% upside).
Mandarin Orchard Singapore (MOS) – growing stronger.
- Its 4Q17 revenue per available room (RevPAR) rose by 2.2% y-o-y, driven by higher room rates while its occupancy rate (mid-80%) dipped y-o-y. Management remains confident that it has space to raise room rates (now at 10-20% below peak levels) and occupancy rates this year, with supply decreasing and demand picking up.
- YTD-Jan, its performance has been fairly strong. Its food and beverage (F&B) unit’s performance improved broadly, in line with the increase in demand. We expect MOS’ RevPAR to increase 7% y-o-y this year.
Crowne Plaza Changi Airport (CPCA) – room for growth.
- 4Q17 RevPAR rose +32% y-o-y, as the occupancy rate grew to mid-80%, from mid-60% last year. With occupancy stabilising, we expect management to start raising room rates in 2018. The lack of new hotel supply near the airport, combined with demand drivers (opening of new terminal, higher corporate demand), augurs well for its outlook.
- While income support of SGD7.5m is now fully drawn down, we expect organic RevPAR growth to more than offset the shortfall.
Retail is more resilient than expected.
- Mandarin Gallery’s (MG) 4Q17 occupancy rate rose to 96.9% (+0.5ppt q-o-q, 2.8ppt y-o-y). More importantly, rental reversions for leases were a positive surprise, with rental growing 3-4%.
- The higher rental rate growth came from an existing tenant renewing its lease with a higher rate; c.16% of leases (% of rent) will expire in 2018, and we now expect flat rental reversions, vs slightly negative reversions previously.
Looking out for acquisitions in Singapore and key global gateway cities.
- In Singapore, its sponsors recently completed Oakwood Premier OUE Singapore (serviced residences), which currently has a 60% occupancy rate and could potentially be an acquisition target by year-end if its performance stabilises.
- With its gearing on the high side, ie 38.8% (maximum allowable limit: 45%), we expect future acquisitions to be made via a combination of equity and debt.
Early refinancing provides another boost.
- OUE Hospitality Trust (OUEHT) announced last December that it has refinanced SGD859m of debts expiring over the next three years. The average cost of debt post refinancing will be 2.4%, 40 bps lower than its current rate of 2.8%, with 71% of debt at fixed rates.
- With no loans expiring until Dec 2020, the early refinancing removes concerns on potential increases in finance costs from an expected rise in interest rates.
BUY, with a SGD0.95 Target Price.
- Our FY18F-19F DPU rises by 1%/3% respectively, reflecting the higher revenue from MG and MOS. Our COE dips by 20bps to 7%, but TG stays at 2%.
- A positive surprise may come from stronger-than-expected visitor arrivals growth (base case: 4-7%).
Vijay Natarajan
RHB Invest
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http://www.rhbinvest.com.sg/
2018-01-31
RHB Invest
SGX Stock
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