OUE H-Trust – CIMB

A more stable hospitality play

70% a hotel and 30% a retail mall, OUEHT is situated at the heart of Orchard Road and offers exposure to both Singapore tourism and retail. With c.70% of its FY14 revenue fixed from retail rent and fixed rent from a hotel master lease, OUEHT is, in our view, a more stable hospitality play than its peers. We expect organic growth to stem from potential uplift in room rates through the Sponsor-funded AEI on MOS and embedded retail rental step-up.

We initiate on OUEHT with an Add rating and a target price of S$0.96, based on DDM at a discount rate of 7.9%. Potential catalysts include surprises in tourist arrivals and stabilisation of the Rupiah.

Stability anchors

The stability of OUEHT is anchored by the Mandarin Orchard Singapore (MOS) master lease and Mandarin Gallery (MG) retail segment. We estimate that c.70% of OUEHT's FY14 revenue is fixed through its retail rent and fixed rent from a hotel master lease. This is higher than hotel peers such as CDLHT and FEHT, which has a near 50:50 split between hotel fixed and variable revenue, and a lesser proportion of retail. Additionally, it has minimal forex and interest-rate risks as all its assets are based in Singapore and it has hedged 100% of its debt (set to expire in 2016 and 2018).

Embedded organic growth

We expect revenue to grow organically by c.3% in FY14. This is largely led by MOS's S$23.1m AEI, which will yield an additional 26 rooms and refurbish 430 rooms. The AEI will be sponsor-funded and completed in phases during FY14-15. So far, renovated rooms have registered 15% increment in room rates. We expect this to lead to 2% growth in RevPAR for FY14-15. There is embedded growth in MG's rent as about 50% of the leases by NLA have step-up structures with annual step-up of c.4.7%.

Supply risk manageable

The upcoming supply of hotel rooms is a risk, but a manageable one, in our view, because 1) historical growth in supply has lagged behind demand, 2) upcoming supply is largely in the mid-tier segment and 3) supply is supported in the mid- to long-term by tourist arrivals . We have factored in 1% drop in occupancy for 2014 and 2015, which will be more than offset by an estimated 3% increment in average room rates