Tuesday 18 March 2014

OUE Hospitality Trust

OCBC on 17 Mar 2014

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. The achieved RevPAR was $254, versus the forecast RevPAR of $252. DPU was 2.1% higher than forecast at 2.90 S cents. We note that 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. 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.

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 $254, versus the forecast RevPAR of $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.

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