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.
LMIR – OCBC
Another hit from weaker IDR
- 1Q14 DPU down 23.6% YoY
- Future distribution likely to stabilize
- Stronger financial position
1Q14 results missed expectations
Lippo Malls Indonesia Retail Trust (LMIR Trust) reported a dismal set of 1Q14 results, with gross revenue falling 14.5% YoY to S$33.7m and NPI down 16.6% YoY to S$31.1m. The soft performance was mainly due to the expiry of rental guarantee income from Pluit Village and a 15.8% depreciation of IDR against SGD. DPU for the quarter
slipped 23.6% to 0.68 S cents, further dragged down by higher finance and other costs. This is below market expectations, given that the quarterly distribution only met 18.7%/21.3% of our/consensus FY14 DPU forecasts. Nevertheless, on a sequential basis, DPU represents a 21.4% improvement, aided by hedging and capital management efforts by LMIR Trust.
Fundamentals still sound
We understand that the currency hedges in place previously were only effective for ~15%-16% of the income. However, over 90% of the income is now covered with the new hedges, which should provide greater stability to LMIR Trust’s distribution going forward. Underlying portfolio performance, we note, has been encouraging thus far, with gross rental income in IDR terms growing 6.3% YoY and portfolio improving 1.8ppt YoY to 95.6% (4Q13: 95.0%). While there was a jump in property operating expenses (+46.2% YoY in IDR terms), we note that this was due to a change in the recognition of parking income (LMIR Trust now operates the mall car parks in-house rather than outsourcing to third-party). In addition, average rental reversion of 9.4% was achieved during the quarter.
Maintain HOLD
Over the quarter, LMIR Trust also repaid its S$147.5m term loan. As a result, gearing ratio improved from 34.3% registered in 4Q13 to 26.7%, with no refinancing needs until Jul 2015. With the stronger financial position, management said it is well positioned for future growth. We note that LMIR Trust is currently exploring at least one investment opportunity, and may potentially conclude a deal this year. However, pending any material development, we lower our fair value slightly from S$0.39 to S$0.37 to account for the weak results. Maintain HOLD.
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.
SREITs – Maybank Kim Eng
The REIT deals
- 1QCY14 results in line for all S-REITs under our coverage.
- The US Fed made another USD10b cut to its monthly bond-buying stimulus operations, as expected.
- Reiterate UNDERWEIGHT as sector fundamentals are far from exciting, apart from the ‘sell in May and go away’ effect.
What’s On Last Week
It was a mixed week for REITs across the region ahead of the Federal Open Market Committee meeting on 29-30 April. As expected, the US Federal Reserve scaled back its QE programme to USD45b, its fourth straight USD10b cut since last Dec 2013, and said more reductions are likely in “measured steps”. On the S-REITs front, the defensive healthcare REITs remained in favour for a second week while the hospitality, industrial and retail REITs turned laggards.
What’s Our View
The S-REITs sector is still down 13.6% YoY and 13.9% since 22 May last year. However, we notice a bottoming-out of sorts since end-March, primarily due to two ladies – Janet (the Dove Yellen) and TINA (There Is No Alternative). There may be a chance of a 1987 melt-up (usually preceding a melt-down), as money is switched from bonds into equities. At this juncture, we refrain from upgrading our sector call as (1) fundamentals have not really improved with YoY forward DPU growth still at modest levels of 3-4%, and (2) the jury is still out on the “sell in May and go away” effect, which has been evident in Asia for the past four years since the GFC (Figure 1). Our economist forecasts Fed funds rate to be raised only after Jun 2015, with SG10Yr yields hitting 2.48% in 2014 and 3.45% in 2015. Should the “risk-on” mode persist for risky assets during May-July, we may revisit our sector call, with an upwards bias, after the 1H14 results.