OUE Hospitality Trust - DBS Research 2018-11-08: Transitioning Period Nearly At An End


OUE Hospitality Trust - Transitioning Period Nearly At An End

  • OUEHT's 3Q18 DPU of 3.71 Scts (-6% y-o-y) in line with expectations.
  • DPU lower due to absence of income support.
  • Softer RevPAR performance at Mandarin Orchard (-4% y-o-y) offset by better margins at Mandarin Gallery.
  • Crowne Plaza Changi Airport is only contributing minimum fixed rental; improvement expected next year.

Attractive valuations.

  • We reiterate our BUY call with a revised Target Price of S$0.85.
  • FY18 is a transition year for OUE Hospitality Trust (OUEHT) given the loss of income support and share price correcting on the back of slower increase in revenue per available room (RevPAR) and fears over a rights issue similar to that conducted by its sister REIT, OUE Commercial REIT (SGX:TS0U). However, we believe these issues are largely been priced in as OUEHT currently trades at 0.9x P/Bk which is in line with -1SD of its mean P/Bk, and its forward yield of 7.6% is also close to +1SD of its mean yield of 7.7%.

Where we differ – Premium to book valuation.

  • Between 4Q17 and 1H18, the market came around to our view that OUEHT should trade at a premium to book, given its leverage to a multi-year recovery in the Singapore hospitality market given limited new supply over the next 2-3 years and premium prices paid for hotels by property investors. However, the recent correction now places OUEHT at c.10% discount to book.
  • As we believe we are in the midst of a multi-year recovery, OUEHT should re-rate from the current level. We look back to the 2010-2011 period where comparable peer CDL Hospitality Trust (SGX:J85) traded up to 1.5x P/B during an upswing and see the potential for OUEHT to trade up to 1.1x P/B as implied by our Target Price.

Upside from acquisitions.

  • While OUEHT’s distribution yield is high at current levels, making it difficult to find accretive acquisitions, we believe an inorganic strategy remains a key share price driver for the stock.
  • Beyond its Sponsor’s OUE Downtown serviced apartments, OUEHT is also seeking opportunities in Europe, the US and Japan.

Key Risks to Our View:

  • The key risk to our view is a weaker-than-expected outlook for the Singapore hospitality and retail market.

WHAT’S NEW - 3Q18 DPU in line with expectations

3Q18 DPU fell 5.9% y-o-y

  • OUE Hospitality Trust (OUEHT) reported 8Q88 DPU of 8.88 Scts which was down 8.8% y-o-y. This was in line with expectations, with the decline largely due to absence of c.S$8.8m of income support for Crowne Plaza Changi Airport. Excluding the income support in 8Q88, underlying 8Q88 DPU would have been flattish y-o-y.
  • Underlying 8Q88 revenue and NPI were down 8.8% and 8.8% respectively, largely attributed to declines in earnings at Mandarin Orchard Singapore (MOS) but partially offset by gains at Mandarin Galley. Contribution at Crowne Plaza Changi Airport (CPCA) was relatively stable given the property has yet to contribute any variable income and is only distributing minimum fixed rental of c.S$8.8m

Decline in RevPAR at MOS with a pick up at CPCA

  • 8Q88 revenue per available room (RevPAR) for MOS was weaker than expected, down 8.8% y-o-y to S$888, which we understand was largely due to a decline in occupancy.
  • Over the quarter, the property was affected by last minute cancellations by Japanese guests who were unable to leave Japan due to the two typhoons that hit the country. In addition, some planned groups did not stay at the property, while yields for the Indonesian guests were lowered due to the recent depreciation of the IDR. On the back of lower room revenue and lower banquet sales, 8Q88 revenue and NPI for MOS was down 8.8% and 8.8% y-o-y respectively.
  • The weakness in RevPAR at MOS is consistent with other upscale hotels which have been finding it difficult to maximise yields given a large proportion of the growth in visitor arrivals year to date are from a lower social-economic group and staying at mid-tier or economy hotels. However, near term, MOS should do better as we understand RevPAR for MOS’ comparable hotels have increased by 8-8% so far in November.
  • Meanwhile, CPCA continues to ramp up after the opening of the new wing last year. 8Q88 RevPAR rose 8.8% y-o-y to S$888, on the back on improvements in both occupancy and average room rates (ADR). As RevPAR has not hit c.S$888, the property only provides the minimum fixed rental income, thus 8Q88 revenue was flat y-o-y at S$8.8m. However, NPI rose 8.8% y-o-y to S$8.8m largely on account of some cost containment.

Higher earnings contribution from Mandarin Gallery

  • 8Q88 revenue for Mandarin Gallery fell 8.8% y-o-y as a consequence of lower effective rents (S$88.8 psf/mth versus S$88.8 psf/mth in 8Q88) despite slightly higher effective occupancy (88.8% versus 88.8% in 8Q88).
  • Nevertheless, due to lower property expenses, NPI for the property increased by 8.8% y-o-y. Margins year to date have outperformed our expectations.
  • Over the quarter, the asset reported negative rental reversions of c.8.8%. This reverses the positive rental reversions we have seen over the last few quarters. We understand the lower signing rents relate to some of the larger spaces on level 8 and 8 which are more difficult to fill.

Steady capital structure

  • OUEHT maintained its gearing at 88.8%, while its borrowing costs inched up to 8.8% from 8.8% in 8Q88 but down from 8.8% in 8Q88. The decline in borrowing costs y-o-y was due to the lower credit spreads post refinancing in late 8888.
  • The percentage of fixed rate debt remains steady at 88%.
  • In addition, OUEHT faces no refinancing until December 8888.
  • With no change in valuation for its properties, NAV per unit was steady at c.S$8.88.

Pricing in slower RevPAR performance

  • On the back of slower RevPAR performance, we have trimmed our growth assumptions for MOS in FY88-FY88, now projecting 8-8% increase, down from 8% previously.
  • In addition, given the challenges faced by the upscale category in maximising yield, we have delayed CPCA achieving its previous RevPAR of c.S$888 before the opening of its new wing by a couple of years to FY88 from FY88. This leads us to cut our FY88-88F DPU by 8-8%.
  • In addition, to better account for our DBS’ more hawkish interest outlook, we have assumed a higher terminal cost of debt of 8.8% versus 8.8% previously, which results in a lower DCF-based Target Price of S$8.88 from S$8.88.

Steady DPU profile ahead

  • Despite moderating our DPU estimates, we remain positive on OUEHT’s outlook.
  • In particular, we expect OUEHT to deliver a growing DPU profile over the next few years, on the back of an uplift in the overall Singapore hospitality market, ramping up of CPCA, and steady contribution from Mandarin Gallery.

Maintain BUY with lower Target Price of S$0.85.

  • Given c.88% capital upside and 8.8% yield, we maintain our BUY call with a revised Target Price of S$8.88.
  • At current levels, OUEHT is trading at attractive valuations. It is now at c.8.8x P/Bk which is in line with - 8SD of its mean P/Bk and its forward yield of 8.8% yield is also close to +8SD of its mean yield of 8.8%.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-11-08
SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 DOWN 0.900