OUE Commercial REIT - DBS Research 2020-03-27: Take Me To The Hilton


OUE Commercial REIT - Take Me To The Hilton

  • Re-branding Mandarin Orchard Singapore to Hilton Singapore Orchard; expand reach to a bigger pool of corporate travelers, enhance position in MICE events.
  • Major refurbishments with estimated capex of S$90m expected to begin in 2Q2020; new flag expected to re-launch in 2022.
  • COVID-19 could impact c.20% of OUE Commercial REIT’s revenue, mostly from its hospitality and retail assets.
  • Singapore office assets remain resilient with sufficient buffer from low expiring rents in FY2020 / FY2021.

What’s New

  • OUE Commercial REIT (SGX:TS0U) announced that they will be collaborating with OUE Limited (SGX:LJ3), master lessee of Mandarin Orchard Singapore, to re-brand the landmark Mandarin Orchard Singapore (MOS) to Hilton Singapore Orchard (HSO). See OUE Commercial REIT Announcements. Management explained that they are leveraging on the weak operating environment due to COVID-19 outbreak to reposition and revitalise the asset.
  • The new Hilton Singapore Orchard is expected to be re-launched in 2022 (in time to capture the next wave of MICE events) to be the largest Hilton hotel in Asia-Pacific, Hilton’s flagship hotel in Singapore and the only Hilton hotel on Orchard Road.
  • We believe the rebranding of MOS into Hilton, an internationally recognised brand, allows OUE Commercial REIT to expand its reach to a bigger pool of international and corporate travellers by tapping on Hilton’s established Hilton Honors programme. By leverage on a strong international brand, it enhances the new HSO’s competitive position to host international MICE events. In addition, we believe it is timely for OUE Commercial REIT to utilise the downtime as a result of COVID-19 to get its hotel ready to ride on the next wave of MICE events.
  • As expected, COVID-19 has impacted the hospitality and retail assets the most within the OUE Commercial REIT portfolio. However, management estimates that potentially c. 20% of its revenue could be at risk, coming from its 2 hospitality assets, Mandarin Gallery and Lippo Plaza. Management will continue to work with its tenants with the support given by the government (property tax holiday just announced) and some additional internal support. Office assets remain resilient and expected to continue to enjoy positive reversions with buffers from low expiring rents in FY2020 / FY2021.

Key highlights:

  • The rationale of the re-branding is to leverage on Hilton’s strong brand recognition and global sales distribution network to:
    • expand the corporate segment (23% of total room revenue) on the back of an established guest loyalty program which has better visibility and lower its transient segment which comprises 57% of total room revenue currently.
    • Reduce the concentration risk of SEA travellers (currently 44% by room nights) and expand travellers from North America (8%) and Europe (8%).
    • reposition the hotel to target more corporate and MICE events.
  • The master lease with OUE Limited remains intact with a minimum rent of S$45m, 15+15 years master lease with first 15 years to expire in July 2028.
  • Major refurbishments will start from 2Q2020 onwards on a phased basis starting with the Main Tower guestrooms followed by Orchard Wing guest rooms from 4Q2020 onwards.
  • Refurbishments will add 5 to 6 meeting rooms to allow for a more complete facility to hold MICE events, and minimal addition of rooms.
  • Estimated capex of S$90m will be funded by drawdown of loans over 18 months, minimal impact to gearing.
  • Expected ROI on capex is approximately 10%.

COVID-19 impact

  • Following the COVID-19 outbreak, the hospitality and retail assets which comprise of 40% of the group’s revenue would be the most impacted. However, given the minimum rent guarantee under the hotel master lease, management estimates that only approximately 20% of its revenue could be potentially at risk from its 2 hospitality assets, Mandarin Gallery and Lippo Plaza.
  • MOS saw occupancy falling to 30-40% while Crown Plaza Changi Airport did slightly better with occupancy at 40-50% supported by some layover flights.
  • Following the closure of the Malaysian borders and the issuance of 14-day Stay-Home-Notice (SHN) to returning Singapore residents, management sees a pick-up in hotel occupancy in the near-term.
  • On Mandarin Gallery, footfall fell by 20-40% in the month of Feb2020 while sales fell by approximately 30- 40%.
  • Management will utilise its advertising and promotion (A&P) budget to help support its retail tenants via rental rebates.
  • Office assets remain resilient and OUE Commercial REIT has renewed some 15% to 20% of the lease expiries in FY2020, bringing down lease expiries in FY2020 from 20% to c.16%.
  • However, management says that new leases are taking longer to finalise, as prospective tenants take a wait-and-see approach.
  • Given the expectations of an economic downturn, management expects office rents to decline. However, there is sufficient buffer from low expiring rents in FY2020/2021 to enjoy positive reversions.
  • See OUE Commercial REIT Share Price; OUE Commercial REIT Target Price; OUE Commercial REIT Analyst Reports; OUE Commercial REIT Dividend History; OUE Commercial REIT Announcements; OUE Commercial REIT Latest News.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-03-27
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