OUE Hospitality Trust

DBS Group Research, May 6

OUE Hospitality Trust (OUE HT) reported Q1 2014 revenue of S$29 million (+1 per cent versus IPO forecast), net property income (NPI) of S$26 million (+3 per cent) and distributable income of S$22 million (+4 per cent).

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 per cent from 75 per cent. Distribution per unit (DPU) of 1.68 Singapore cents was 4.3 per cent higher than forecast, with the additional boost derived from lower trust expenses.

A shift to corporate segment led to lower revenue per available room (RevPAR) but higher food and beverage (F&B) contribution. Q1 2014 RevPAR of S$248 was 5 per cent lower than FY2014 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 (meetings, incentives, conventions and exhibitions) calendar for the rest of 2014.

Retail lease renewals are a key risk. Although only 9 per cent of retail leases by gross revenue are coming up for renewal in FY2014, 88 per cent of leases will expire over FY2015/16. While occupancy cost remains stable at about 20 per cent, 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.

Maintain "buy", with target price of S$0.95. OUE HT currently offers investors yields of 7.8 per cent-8.1 per cent, which is one of the highest among the hospitality S-Reits. We like the stock for its high fixed income component (70 per cent per annum), which provides a stable minimum yield of 4.4-4.6 per cent while having room for upside.

BUY