• Flat RevPAR growth YoY
• Look forward to Changi’s Jewel
• 6.3% FY18F yield as at 30 Jul

2Q Results Came at the Lower End of Our Expectations

OUE Hospitality Trust’s (OUEHT) 2Q results were within expectations, albeit on the lower end. Gross revenue dropped 1.4% YoY to S$30.7m, with hospitality revenue flat YoY and retail revenue down 4.3%. 2Q DPU dropped 3.3% to 1.17 S cents or 22.7% of our initial full-year forecast, mainly because OUEHT no longer receives income support for Crowne Plaza Changi Airport (CPCA). As a reference, 2Q17 DPU contributed 23.6% of FY17’s DPU.

Resilient RevPAR Performance for MOS in 2Q18

Generally, we have observed that OUEHT’s Mandarin Orchard Singapore (MOS) has continued to outperform its peers – both against industry statistics, and other listed hospitality SREITs. Except against Far East Hospitality Trust’s surprise 6.9% increase in RevPAR, OUEHT’s MOS has continued to do slightly better than its peers. RevPAR for MOS was down 0.5% YoY, less than declines seen for peers, as the hotel saw lower wholesale demand, which was partially offset by higher transient demand.

Management shared that the Trump-Kim summit had affected visa issuances for tour groups, and that there were also cancellations for banquets and corporate activities during the summit period. Recall that MOS RevPAR growth was +8% YoY in 3Q17, +2% YoY in 4Q17, and +7% YoY in 1Q18.

Looking past the one-off effect of the Trump-Kim summit in 2Q18, we expect MOS to post low single-digit RevPAR growth in 2H18 given the high base effect of 2H17. CPCA’s 2Q RevPAR came in at S$168, up 10.5% YoY as the asset continues to stabilise.

Master lease income was the same at minimum rent, and we expect the asset to generate minimum rent for the rest of 2018. We believe the asset will continue receiving minimum rent for the rest of FY18, but look forward to the opening of Jewel, which should help to boost the attractiveness of the Changi area in general.

Fairly Valued as at 30 Jul Close

OUEHT’s retail NPI dropped 1.9% YoY on the back of a 4.3% decline in revenue, which was in turn mainly due to the negative rental reversions of previous quarters. Occupancy remained high at 97.4% (vs. 93.9% in 2Q17). We do note that the asset recorded a positive rental reversion of +5.1% for leases signed during the quarter (~4.2% of its NLA) but believe it is too early to call a bottom on Orchard retail.

Given the rising interest rate environment, our cost of equity for OUEHT increases from 7.6% to 8.0% and our fair value drops 6% from S$0.84 to S$0.79.

As of 30 Jul’s close, OUEHT is trading at 6.3% FY18F yield and 6.5% FY19F yield. Against our fair value, OUEHT would trade at a 6.4% FY18F yield and 6.6% FY19F yield. We find the REIT fairly valued as at 30 Jul’s close. Maintain HOLD.

Source: OCBC Research - 31 Jul 2018