Category: OUE H-Trust
OUE H-Trust – OCBC
Defensive lease structure to buffer headwinds
- 3Q14 DPU 2.5% above IPO forecast
- Healthy balance sheet
- Valuations appear fair
3Q14 results within our expectations
We met up with OUE Hospitality Trust (OUEHT) after its 3Q14 results which exceeded its IPO prospectus projections marginally but was within our expectations. Gross revenue came in at S$28.5m and was 0.7% higher than its forecast. DPU of 1.64 S cents was 2.5% above its 1.6 S cents projection. For 9M14, revenue and DPU of S$85.5m and 4.96 S cents was 0.7% and 3.1% above OUEHT’s forecast; and constituted 75.4% and 74.0% of our FY14 estimates, respectively. OUEHT managed to achieve a RevPAR of S$252 in 3Q14, versus its S$248 forecast, due to the completion of its Mandarin Orchard Singapore (MOS) renovation and higher guests’ contribution from the corporate business segment. However, this was still lower than the S$261 RevPAR attained in 3Q13 (after adjusting for the shorter financial period since it was listed on 25 Jul 2013). This can be attributed to the weaker visitor arrivals from Indonesia as a result of the presidential elections and strong SGD. We understand that Indonesians form ~25%-30% of OUEHT’s room nights occupied.
Resilient portfolio
Despite headwinds facing Singapore’s hospitality sector, we believe OUEHT’s defensive long-term master lease for MOS would provide a buffer to unitholders given its downside protection structure. Mandarin Gallery’s (MG) momentum is also likely to remain robust, as we expect continued positive rental reversions going into 2015. Both tenants’ sales and footfall at MG rose 5% YoY in 3Q14 despite the challenging retail scene in Singapore. In terms of balance sheet strength, OUEHT’s gearing stands healthy at 32.7%, with an average cost of debt of 2.2%. 100% of its debt has also been fixed via interest rate swaps.
Maintain HOLD
We maintain our HOLD rating and S$0.85 fair value on OUEHT. Although FY14F and FY15F dividend yield of 7.3% and 7.5% remain attractive, we believe valuations are fair. OUEHT is currently trading at a forward P/B of 1.0x.
OUE H-Trust – CIMB
Post-results feedback
The key issues discussed during the investor luncheon we hosted recently include: 1) higher room rates for renovated rooms, 2) improvement in the Indonesian business at Mandarin Orchard Singapore (MOS) post election, 3) future rental reversion at MG, which is expected to track inflation, and 4) more rooms for inorganic growth. Given further room to grow both organically and inorganically, we have maintained our Add rating with unchanged target price of S$0.96.
What Happened
We recently hosted an investor luncheon for OUE Hospitality Trust following its 3QFY14 results announcement.
What We Think
In 3Q14, MOS posted an average room rate of S$280/night while occupancy was c.90%. During the meeting, it was pointed out that rooms post renovation were able to achieve S$30-40/night more than pre-renovated rooms. F&B was noted to have performed better in 3Q, making up 30% of total revenue (vs. 25-26% for 3Q13). In terms of customer profile, Indonesians, Japanese and Chinese accounted for 30%, 10% and 8% of the hotel’s business, respectively, forming the top three groups of customers at MOS. YTD, it was noted that the Indonesian and Japanese businesses have dipped slightly while business from China grew by c.10% (as a result of securing a large group of Chinese visitors in 1Q14). Having said that, with the completion of the election at Indonesia, business contribution from Indonesians was noted to have picked up.
Mandarin Gallery (MG) similarly performed well during the quarter, with both tenant sales and footfall growing by 5% yoy in 3Q14. Management expects rental reversion at MG to hover at 4-5%, tracking inflation, particularly for street-front (duplex) shops, where the passing rent of S$50-55 psf/mth is close to spot rates. Given the location of the mall, management remains confident about renewing the leases (c.44% by gross rent) due next year. Concurrently, management has guided for an internal leverage target of 40-45%. As such, OUE-HT has another c.S$400m of debt headroom for the upcoming acquisition of Crowne Plaza at Changi Airport. In addition, there are c.200 rooms in MOS that are scheduled for soft refurbishments.
What You Should Do
Given further room to grow both organically and inorganically, coupled with an attractive valuation of 7.7% FY15 dividend yield (vs. peers’ 7.3%), we maintain our Add rating and target price of S$0.96.
REITs – CIMB
Engines started
The Singapore Tourism Board (STB) recently released the Jul 2014 visitor arrival and hotel RevPAR data. Although the numbers did not appear exciting at first glance, the mom growth figures in Jul 2014 were the strongest in the last five years. This trend was in line with our expectations of a stronger tourism/hospitality sector in 2H14 and could mark its turnaround. We maintain our sector Overweight rating, with CDL-HT and OUE-HT as our top picks in the hospitality REITs sector.
What Happened
STB's recently published Jul 2014 tourism numbers showed that tourist arrivals dipped 0.9% yoy, while hotel RevPAR was flattish in 7M14.
What We Think
Although visitor arrivals in Jul 2014 were weaker than in Jul 2013, they were stronger than in Jun 2014. Although Jul is a seasonally strong month for tourism, we think it noteworthy that visitor arrivals rose 19.2% mom in Jul 2014 compared to the historical average of 13.5% (since 2010). Similarly, Chinese and Indonesian tourist arrival rates rose 97.4% and 6.7% mom in Jul 2014, respectively, above the historical average of 65.5% and -1.7%, respectively. Although this growth could partly be due to the low base from 1H14, we think that it marks a turnaround in the tourism sector, thanks to the easing political tension in Thailand and slight recovery from the negative impact of the MH370 disappearance earlier this year. The recovery is supported by the gradual recovery in Chinese visitor arrivals growth in Singapore during the past two months (vs. arrival rates in Jun-Jul 2013) from the trough of -51.7% yoy in May 2014. In Jul, we note that hotel occupancy growth of 5.1% mom was the strongest in the past five years, despite the flattish yoy hotel RevPAR. Among the various classes of hotels, luxury and upscale hotels continued to deliver strong performances, posting RevPAR gains of 11.2% and 2.8% yoy, respectively. Economy hotels posted a surprisingly strong RevPAR increase of 7.5% yoy. As highlighted in our previous report titled 'Impending turnaround', we continue to believe that Singapore's hospitality market will deliver stronger performance in 2H14 than 1H14, barring any unforeseen circumstances. Our view is based on the following positive factors: 1) the stabilisation of the Indonesian Rupiah, 2) delays in the delivery of several hotel projects, which will halve the estimated new supply of hotel rooms in FY14, 3) the slightly stronger tourist arrivals in 2H14 (+2.8% hoh, based on our estimates), and 4) the stronger corporate spending expectations in 2H14.
What You Should Do
We believe that CDL-HT (Add, TP:S$1.88) and OUE-HT (Add, TP: S$0.96), which are REITs with upscale hotels in their Singapore portfolio, will be prime key beneficiaries of the anticipated recovery in the hospitality sector in 2H14. Currently, CDL-HT is trading at 1.0x FY14 P/BV, with 6.5% FY14 dividend yield and 7.1% FY15 dividend yield, while OUE-HT trades at 1.0x FY14 P/BV, with 7.8% FY14 dividend yield and 8.0% FY15 dividend yield. These valuation levels are undemanding in our view when compared against CDL-HT's trading range of 5-6% yield and 1.4x P/BV in 2010/11.
OUE H-Trust – OCBC
Better days ahead
- Expecting higher demand in 2H
- Well positioned for uptick
- Positives likely priced in
Anticipating a better 2H14
We expect OUE Hospitality Trust (OUEHT) to benefit from a seasonally higher hospitality demand in 2H14. A check on the preliminary hotel statistics published by Singapore Tourism Board (STB) painted an improved hospitality outlook in Jul – RevPAR grew by 5.4% MoM to S$223.4, while average occupancy rate increased to 90% from 84.9% in Jun. While the international tourist arrivals to Singapore declined by 2.5% for the first seven months of 2014, we note that the number of arrivals in Jul represented a 19.2% MoM jump to 1.4m. More importantly, the arrivals from Asia registered a 16.7% MoM increase in Jul. Given that Asia formed ~74% of OUEHT’s Mandarin Orchard Singapore (MOS) customer profile for 1H14, we believe that OUEHT is likely to put on a better showing in 2H should the demand be sustained.
Recent interim results met expectations
In 2Q14, OUEHT delivered a consistent set of results. NPI and income available for distribution came in at S$25.2m and S$21.1m respectively, which was 1.2% and 2.5% higher than its respective prospectus forecasts. DPU for the quarter was also 2.5% above its forecast at 1.64 S cents. For 1H14, DPU amounted to 3.32 S cents, meeting 49.5% of our full-year distribution projection. While 2Q RevPAR of S$242 missed its prospectus forecast of S$258, we understand that this was partly due to the accelerated renovation schedule in the quarter to capture the expected uptick in hospitality demand in 2H. As at Jul, 160 out of a total of 430 guestrooms have completed refurbishments. This would allow OUEHT to leverage on the newly renovated rooms to attract customers seeking a premium accommodation in Orchard Road area, in our view.
Maintain HOLD on valuation grounds
We are making minor adjustments to our FY14 forecasts since the interim results were largely consistent with our expectations. There is no change to our fair value of S$0.85. Maintain HOLD as OUEHT appears to be fairly priced at current level.