• Bright operational prospects
• Attractive yield of 6.6%
• BUY with S$0.82 FV

Highest YoY DPU Growth Reported Thus Far

OUE Hospitality Trust (OUEHT) posted a strong set of 2Q17 results last night. Revenue increased 16.0% YoY to S$31.2m, supported by stronger contributions from both Hospitality and Retail segments. Correspondingly, NPI increased 15.0% to S$26.6m. 2Q17 DPU jumped 31.5% YoY to 1.21 S cents or 25.3% of our full-year forecast, which came in at the higher end of our expectations given that second quarters are seasonally the weakest quarter for Mandarin Orchard Singapore (MOS). OUEHT’s spectacular YoY DPU growth is the highest posted by S-REITs under our coverage thus far.

MOS Surprises With a 5% Increase in RevPAR

Surprisingly, 2Q17 RevPAR at MOS increased 5% YoY to S$210. OUEHT's strategy of maintaining rates has paid off, with MOS ADR growing by an estimated 1-2% and occupancy growing around 3-4 ppt YoY to a mid-80% range. From what we understand, a stronger leisure segment helped to buoy rates; corporate demand continues to remain soft albeit stabilized.

The ramp-up at Crowne Plaza Changi Airport (CPCA) continues to progress smoothly, with occupancy increasing from the 60% range when the extension opened to mid-70% in 2Q17. On the retail side, the strong results at Mandarin Gallery were mainly contributed by Victoria’s Secret, which helped to bump up the average occupancy rate from 79.1% in 2Q16 to 93.9%.

Top Pick Within Hospitality

Given brighter operational prospects in the nearterm with a sunnier outlook for MOS and the healthy contributions expected from Mandarin Gallery, we lower our cost of equity from 7.9% to 7.6%. After adjustments, our fair value estimate increases from S$0.75 to S$0.82. We note that OUEHT is trading at a relatively attractive FY17F yield of 6.6%, relative to the 5.2% to 5.6% range for other hospitality REITs under our coverage.

In the medium-term (two to four years), we continue to look forward to increased traffic at CPCA after the opening of Terminal 4 in 2H17. Given the positive operational outlook as well as currently undemanding unit prices, we re-iterate BUY on OUEHT as our top pick within the hospitality REIT sub-sector.

Source: OCBC Research - 2 Aug 2017