• Hotel RevPAR down 6.8% YoY
• Updated land lease to expiry
• FV increases to S$0.73

2Q16 results below expectations

OUE Hospitality Trust’s (OUEHT) 2Q16 DPU fell 39.5% YoY to 0.92 S cents or 17.2% of our fullyear forecast and 16.4% of Bloomberg consensus DPU forecast. 1H16 DPU came up to 37.8% of our full-year forecast and 36.1% of consensus forecast. While we forecasted a greater contribution from 2H16 from the Crowne Plaza Changi Airport (CPCA) extension as well as the opening of Victoria’s Secret and Michael Kors at Mandarin Gallery, we judge this quarter’s results to be below our expectations.

We had expected hospitality RevPAR to be more resilient given OUEHT’s positioning along Orchard Road. Adjusting for the rights issue, DPU would have dropped 19.1% YoY to 1.23 S cents. 2Q16 gross revenue dropped 9.2% YoY to S$26.9m on lower contributions from both hospitality and retail. NPI dropped 10.2% YoY to S$23.2m.

Hospitality and retail NPI both down YoY

2Q16 hospitality revenue was down 6.6% YoY on the back of a 7.1% decline in contribution from Mandarin Orchard Singapore (MOS) and a 2.7% decline in contribution from CPCA. Accordingly, NPI for the hospitality segment dropped 7.0% YoY. MOS RevPAR for 2Q16 declined 8.3% YoY to S$200 on lower occupancy. CPCA RevPAR dropped 2.6% YoY to S$225 due to lower rates, which was partially mitigated by higher occupancy. The retail segment suffered a 15.2% YoY decline in revenue and 19.3% YoY decline in NPI.

Reduction of risk-free rate assumption

As we adjust our occupancy and rate assumptions going forward, our FY16 DPU forecast falls 15.3% to 4.54 S cents, while our FY17 DPU forecast dips 9.7% to 5.03 S cents. Against yesterday’s closing price of S$0.71, our blended FY16/17 forecasted yield comes up to 6.7%. We adjust our remaining years to land lease expiry (weighted by asset valuation) to reflect the acquisition of CPCA extension, which was completed yesterday.

Upon decreasing our risk-free rate from 3.0% to 2.4% (cost of equity: 8.0%) and after the assumption tweaks above, our fair value increases from S$0.67 to S$0.73. As at 1 Aug 2016, OUEHT has a lower gearing of 37.3% as compared to 42.2% as at 1Q16. Maintain HOLD.

Source: OCBC Research - 2 Aug 2016