OUE Hospitality Trust - CGS-CIMB 2018-05-02: 1Q18 Mandarin Orchard Singapore Continues To Outperform

OUE Hospitality Trust - CGS-CIMB 2018-05-02: 1q18 Mos Continues To Outperform OUE HOSPITALITY TRUST SGX: SK7

OUE Hospitality Trust - 1q18 Mos Continues To Outperform

  • OUE Hospitality Trust's 1Q18 DPU of 1.26 Scts (-3.1% y-o-y) was in line with consensus and our expectations, at 24% of our full-year forecast.
  • The decline in DPU was primarily due to the absence of income support for Crowne Plaza Changi Airport which was fully drawn down by 3Q17. That said, operating performance was healthy.
  • Led by increase in room rates, Mandarin Orchard Singapore recorded 6.9% y-o-y improvement in RevPAR. Crowne Plaza Changi Airport’s RevPAR hiked up 13.6% y-o-y as the asset continues to ramp up. We are confident that Crowne Plaza Changi Airport would earn higher than the minimum rent in FY19F.

  • Maintain ADD on OUEHT as we project that higher contributions from Mandarin Orchard Singapore and lower borrowing costs could offset the absence of income support.

Results summary

  • OUE Hospitality Trust's 1Q18 DPU fell 3.1% y-o-y mainly due to the absence of income support for Crowne Plaza Changi Airport (CPCA) which was fully drawn down by 3Q17. Nonetheless, the REIT saw healthy operational performance with Mandarin Orchard Singapore (MOS) and CPCA recording 6.9% and 13.6% y-o-y increase in RevPAR, respectively. 
  • As a portfolio, OUEHT saw an 8.6% improvement in RevPAR. Higher hospitality income was partially offset by a 3.3% drop in retail revenue (function of negative rental reversion in the past quarters).

Mandarin Orchard Singapore (MOS) continues to outperform

  • Mandarin Orchard Singapore (MOS)’s RevPAR improved 6.9% y-o-y to S$232. The increase was largely driven by an increase in room rates as the REIT saw higher demand from the corporate and wholesale segments. Occupancy hovered around the high-80s level.

Crowne Plaza Changi Airport (CPCA) steadily ramping up

  • Crowne Plaza Changi Airport (CPCA)’s RevPAR rose 13.6% y-o-y to S$184, due to the ramp-up in occupancy to the mid- 80s (1Q17: mid-70s; 4Q17: c.80%). Notwithstanding the improved operating performance, the master lease income received by CPCA was below the minimum rent of S$5.6m/quarter or S$22.5m p.a. Hence, CPCA continued to receive minimum rent. 
  • With the continued ramp-up of Terminal 4 as well as the opening of the Jewel Changi Airport in 1Q19, we are confident that CPCA would earn higher than the minimum rent in FY19F.

Retail rental reversions have bottomed

  • Retail revenue decreased 3.3% y-o-y due to lower effective rents of S$22.6psf per month (1Q17: S$23.74). This was a result of negative rental reversions in preceding quarters. Mandarin Gallery’s (MG) average occupancy rate was higher at 96% in 1Q18 vs. 94.7% in 1Q17. 
  • Encouragingly, the REIT achieved positive rental reversion of 2.2% for base rent for leases signed in 1Q18 (for c.3% of the NLA). This was the second consecutive quarter of positive reversion from retail.

Capital management

  • Finance expenses decreased 2.3% y-o-y mainly due to lower cost of borrowings following the REIT’s refinancing of its entire debt outstanding in 4Q17. 
  • Average cost of debt decreased to 2.3% p.a. (1Q17: 2.5%). 
  • Gearing stood at 38.7% with 71% of borrowings on fixed rates. The REIT has no refinancing due until Dec 2020.

Maintain ADD

  • We trim our FY18F-20F DPU by 0.6-0.8% as we temper our expectations for CPCA and trim our interest income assumptions. We maintain ADD with an unchanged DDM-Target Price (S$0.92)
  • We believe that higher contributions from MOS and lower borrowing costs could offset the absence of income support. Accordingly, we expect flat DPU for FY18F. 
  • Downside risks could come from higher-than-expected rate hikes, slower-than-expected recovery in the Singapore hospitality market and unfavourable acquisitions.

YEO Zhi Bin CGS-CIMB | LOCK Mun Yee CGS-CIMB | https://research.itradecimb.com/ 2018-05-02
SGX Stock Analyst Report ADD Maintain ADD 0.920 Same 0.920