Category: OUE H-Trust
Hotel REITs – CIMB
Quantity lower, quality higher
Visitor arrival to Singapore was flat yoy in 1Q14. This was largely due to lower Chinese visitor arrivals in Feb and Mar, which we attribute to: 1) a new tourism law in China, and 2) the MH370 incident. Although the number of visitors from China has dwindled, we believe the average Chinese spending in Singapore has strengthened, benefitting the luxury and upscale hotels. We maintain our Add rating on OUE-HT (TP: S$0.96) and CDL-HT (TP: S$1.97), and our Reduce rating on FEHT (TP: S$0.80).
What Happened
Recent data from the Singapore Tourism Board (STB) revealed that visitor arrivals to Singapore remained flat yoy in 1Q14. During this period, higher visitor arrival from South East Asia (+4.1% yoy), on the back of stronger arrivals from Indonesia (+5.5% yoy), was offset by weaker visitor arrivals from China (-14.0% yoy). On the other hand, it was noted that RevPAR for Singapore hotels during the first four months rose by 2.1% yoy, despite a 0.7% yoy drop in occupancy. The growth was attributed to the upscale and luxury hotel segments, where RevPAR expanded by 10.1% and 3.1% yoy, respectively, vs. -4.4% in the mid-tier and +0.2% in economy segments.
What We Think
The slowdown in visitor arrivals from China could mainly be attributed to 1) the new tourism law in China which took effect in Oct 2013, and to a lesser extent 2) the MH370 incident. During Feb 14 and Mar 14, Chinese visitor arrivals dropped by an average of 19.5% yoy. During this period, although fewer Chinese came on multi-country package tours, more are travelling here on their own – and this group of visitors tend to spend more. As highlighted by data released by STB earlier this year, total Chinese tourism receipt in 4Q13 grew by 1% despite visitor arrival from China dipping by 31% over the same period. During 2013, Chinese spending was also noted to reach c.S$3.0bn, exceeding the Indonesians (at S$2.3bn) for the first time since 2007. Furthermore, tourism shopping tax refund company Global Blue recently pointed out that Singapore remains the second most favoured shopping destination for the Chinese after Paris. This trend is expected to strengthen further as the government aims to position Singapore as a top luxury lifestyle destination through various partnerships with Chinese tourism providers. Besides the patronage from big Chinese spenders, the upscale and luxury hotel segments are expected to benefit from 1) stronger Indonesian visitor arrivals, 2) packed calendar of events in 2014, and 3) a potentially stronger corporate spending trend as the global economy continues to recover in 2014.
What You Should Do
With the luxury and upscale hotel segments’ RevPARs expected to be strong in 2H14, we maintain our Add rating on OUE-HT (TP: S$0.96) as the company has the ability to boost RevPAR through the sponsor-funded AEI of its Mandarin Orchard hotel. Similarly, we remain positive on CDL-HT (Add; TP: S$1.97) and expect continual good performance from its Singapore and Maldives portfolios. On the other hand, we are negative on FEHT (Reduce; TP: S$0.80) as we expect its portfolio of mid-tier hotels, particularly those located along Orchard Road, to come under pressure amid intensifying competition in the coming months.
OUE H-Trust – DBSV
Saved by the bell-y!
- DPU of 1.68Scts comprises 25% of FY14F – in line
- Higher F&B revenue offsets lower RevPAR
- Maintain BUY and S$0.95 TP
Highlights
Results in line. OUE HT reported 1Q14 revenue of S$29m (+1% vs IPO forecast), NPI of S$26m (+3%) and distributable income of S$22m (+4%). The higher revenue and NPI were attributable to better performance of the hotel component, as well as savings in property expenses from the Mandarin Gallery, with NPI margins for the mall rising slightly to 76% from 75%. DPU of 1.68Scts was 4.3% higher than forecast, with the additional boost derived from lower trust expenses.
Our View
Shift to corporate segment led to lower RevPAR but higher F&B contribution. 1Q14 RevPAR of S$248 was 5% lower than FY14 estimate of S$257, a result of lower number of Indonesian guests due to the April election and this contributed to a decline in the proportion of transient guests. This was mitigated in part by higher demand from the corporate and wholesale segment, especially during the February Air Show. The hotel’s strategy to target corporate demand has met with some success in terms of achieving better hotel occupancies and higher F&B revenue as a result of more corporate meetings within the hotel. Looking ahead, we expect to see a dip in transient guests due to competition from Traders Hotel which will open later this year. We are confident however, that the Manager will be able to sustain higher corporate demand given the robust MICE calendar for the rest of 2014.
Renewing retail leases a key risk. Although only 9% of retail leases by gross revenue are coming up for renewal in FY14, 88% of leases will expire over FY15/16. While occupancy cost remains stable at c.20%, the key challenge for the Manager would be to balance tenant retention with refreshing trade mix, to maintain its position as a niche mall within the Orchard Road area.
Recommendation
Maintain BUY, TP S$0.95. OUEHT currently offers investors yields of 7.8%-8.1%, which is one of the highest among the hospitality SREITs. We like the stock for its high fixed income component (70% p.a.), which provides a stable minimum yield of 4.4-4.6% while having room for upside. We maintain BUY, TP S$0.95.
OUE H-Trust – CIMB
Higher F&B revenue more than offsets lower RevPAR
OUEHT’s 1Q14 DPU was in line with expectations, at 24% of our full-year forecast and 4.3% above its IPO forecast. The better performance was due to higher F&B revenue from increased corporate meetings and banquet sales. The higher F&B revenue more than offset the lower 1Q14 RevPAR at S$248 (vs. IPO forecast of S$257). Retail rental income grew 8.5% yoy with higher occupancy and stable passing rent of S$23.60 per sq ft per month. OUEHT has operational NPI yield of 6% and FY14-15 dividend yields of 8%, the highest among its hospitality peers. We continue to view OUEHT as a more stable hospitality REIT and maintain our Add rating and DDM-based target price (discount rate: 7.9%.)
Higher F&B revenue more than offsets lower RevPAR
The higher F&B revenue was attributed to the increase in corporate meetings held and banquet sales. Management aims to increase the number of corporate guests in order to boost revenue. The proportion of corporate guests increased from 23-24% of total guests in 2013 to 28% in 1Q14.
1Q RevPAR of S$248 was flat qoq but fell 1.2% yoy, mainly due to the lower room inventory available due to ongoing renovation and lower number of Indonesian guests prior to the parliamentary election period in Apr. Excluding the lower inventory impact, RevPAR would be S$252 in 1Q14.
MG’s NPI rose 8.5% yoy due to higher occupancy and stable rent.
Continue to view OUEHT as a more stable hospitality play
Given that c.70% of FY14 revenue is fixed from retail rent and fixed rent from the hotel master lease, we continue to view OUEHT as a more stable hospitality play than its peers. Additionally, its capital structure is stable with gearing of 32%, 100% of debt fixed and no refinancing requirements until Jul 2016.
Maintain Add rating
OUEHT’s FY14-15 dividend yields of 8.0-8.1% are the highest among its hospitality peers (average of 7.1-7.3%). Given its stable structure and high-quality assets, we believe that there is further room for OUEHT to re-rate. We maintain our Add rating and target price of S$0.96.
OUE H-Trust – OCBC
Bolstered by hotel revenue
- 1Q14 DPS above view
- RevPAR lower at S$248
- Total 64 guest rooms renovated
1Q14 results exceeded expectations
OUE Hospitality Trust’s (OUEHT) 1Q14 gross revenue and NPI came in 1.4% and 2.7% higher than its respective prospectus forecasts at S$28.7m and S$25.6m. The stronger topline, we note, was due to higher master lease revenue from Mandarin Orchard Singapore (MOS). While Mandarin Gallery’s effective gross rent of S$23.6 psf pm (S$23.69 in prior period) was in line with forecast, the mall benefited from lower utilities and marketing expenses, thus leading to stronger NPI growth. Coupled with lower trust expenses, DPS registered 1.68 S cents, 4.3% higher than forecast. This also exceeded our expectation, as 1Q14 distribution already formed 26.5% of FY14 DPS projection (consensus: 25.1%).
Better performance due to higher F&B sales
We understand that OUEHT’s move to increase the hotel room revenue from corporate guests segment had resulted in an increase in the number of corporate meetings held at MOS, thus contributing to higher F&B sales. In addition, F&B revenue was boosted by increased banquet sales. Expectedly, MOS also enjoyed strong occupancy and room rates in Feb, thanks to the Singapore Airshow 2014. However, 1Q14 RevPAR of S$248 fell short of its prospectus forecast of S$257 due to lower revenue from transient guests segment, though partially cushioned by higher demand from corporate and wholesale segments. Compared to pro forma 1Q13 RevPAR of S$251, we note that RevPAR was slightly down by 1.2% due to lower room inventory as a result of ongoing renovation. Excluding this impact, 1Q14 RevPAR would have been higher at S$252.
Maintain HOLD
As at Apr 2014, OUEHT disclosed that it has completed the refurbishment of a total of 64 guest rooms out of the 430 guest rooms to be renovated, and that the renovation programme is on track to complete in phases by end 2015. For the rest of 2014, management remains positive on the corporate travel, tourism and retail segments in Singapore. We now factor in the better results into our projections. This raises our fair value from S$0.82 to S$0.85. Maintain HOLD.
OUE H-Trust – OCBC
Downgrade on valuation grounds
- RevPAR of S$254
- Orchard hotels opening in 2Q and 3Q
- Downgrade to HOLD
Mandarin Orchard drives results
FY13 results, released on 25 Feb, for OUE Hospitality Trust (OUEHT) were in line with ours and the street’s expectations. For FY13 (from listing date of 25 Jul to 31 Dec 2013), gross revenue at S$50.6m was 1.3% higher than management’s IPO forecast mainly due to better-than-expected performance recorded by Mandarin Orchard Singapore (MOS) hotel. The achieved RevPAR was S$254, versus the forecast RevPAR of S$252. Net property income at S$44.8m was 1.4% higher than forecast. Distributable income was 2.4% higher than forecast at S$38.2m. DPU was 2.1% higher than forecast at 2.90 S cents.
Refurbished rooms see 15% premium
In FY13, MOS had 26 guest rooms added, bringing the number of rooms from 1,051 at listing to 1,077. 32 refurbished guest rooms achieved room rates ~15% higher than non-renovated rooms. 430 guest rooms are scheduled to be refurbished in phases in 2014 and 2015. Mandarin Gallery is 100% committed, with more than 90% of leases (by NLA) having step-up structures with a weighted annual step-up of ~4.7%. Five leases, with account for ~2.2% of NLA, were renewed in 4Q13 with average weighted rental reversion of 28%.
New competition in 2Q and 3Q
MOS will be seeing increased competition in the Orchard Road region from 2Q14. Traders Orchard Gateway Hotel (upscale/luxury, 502 rooms), is expected to open in 2Q14, and Hotel Grand Chancellor Orchard (mid-tier, 488 rooms) and Hotel Grand Central (mid-tier, 264 rooms) are expected to open in 3Q14. Traders Orchard Gateway will be located very close to Mandarin Orchard and will compete in the same tier. The first few months of the new hotel’s operation will likely present even keener competition with discounts.
Downgrade to HOLD
Raising our cost of equity from 7.8% to 8.7% due to higher risk-free rate and expected market return assumptions, we lower our fair value from S$0.94 to S$0.82 for OUEHT and downgrade it from Buy to HOLD.