OUE Hospitality Trust

Kim Eng on 24 June 2014

• Initiate at BUY and TP of SGD0.93 (cost of equity =8%, Tg=1.5%), offering a decent 13% total return.
• Offers the highest yield among Singapore-based hospitality and retail S-REITs, supported by its two prime assets.
• Good quality sponsor’s ROFR to drive future growth.

Initiate with BUY and TP of SGD0.93
OUE Hospitality Trust (OUEHT), the only trust with pure Orchard Road play, owns the integrated 125,000-sq ft high-end fashion mall Mandarin Gallery (MG; 30% of revenue and portfolio value) and the upscale 1,077-room Mandarin Orchard Singapore hotel (MOS; 70% of revenue and portfolio value). In our view, it stands to benefit from the growing hospitality segment in Orchard Road. OUEHT looks attractive as it offers a FY14E DPU yield of 7.3%, the highest among Singapore-based hospitality and retail S-REITs.

Positive business dynamics to drive DPU growth
Modest room additions in Orchard Road and the ongoing refurbishments to upgrade 430 rooms at MOS, will ensure RevPar for MOS remains resilient. Limited new retail space (0.31m sq ft of NLA) on Orchard Road over the next three years and measures to optimise the tenant mix at MG suggest scope for rental upside at MG. Their close proximity to key tourist attractions, commercial and medical clusters puts them in good stead to continue to ride the leisure, business and medical tourism wave. We expect visitor arrivals to be supported by new tourist attractions, and deeper penetration into the MICE and medical businesses.

Catalyst: Crowne Plaza Changi Airport
The sponsor, OUE Limited, is a leading real-estate owner, developer and operator, who manages the Meritus hospitality brand. The sponsor’s right of first refusal (ROFR) includes Singapore’s first airport hotel, Crowne Plaza Changi Airport (320 rooms). Post development of an adjacent site, the enlarged hotel will offer 563 rooms.