• Expecting a flat 3Q18…
• But there are pockets of value
• OUEHT is newly minted top pick

Hotels: 3Q18 Looking to be a Flattish Quarter

According to Singapore Tourism Board figures, visitor arrivals were up +6.1% YoY for the month of Jul and +7.8% YoY for Aug. Visitor days were up +3.2% in YoY in Jul, and +6.5% YoY in Aug. Meanwhile, industry RevPAR increased +2.7% YoY in Jul and +5.5% YoY in Aug. By tiers, MidTier hotels posted higher RevPAR growth than Upscale hotels for both months (see report appendix for details).

This data, supported by feedback from our industry sources, suggests somewhat flat 3Q18 RevPAR growth for SG hotels held by hospitality REITs under our coverage. We expect Mid-Tier hotels to continue their outperformance over Upscale. Looking ahead to 2019, we remain optimistic for the hotel segment and expect high single-digit RevPAR growth rates for the industry.

Serviced Residences: Softness to Continue?

There has been no major change to our outlook on serviced residences. With the ongoing USChina trade tensions, we believe companies will be more budget conscious and less willing than before to commit to long-term stays. Meanwhile we are cautious to believe that the recent oil price rally will bolster demand from the O&G industry in the near-term, given that time is needed for the oil majors to revise their capex expectations.

Tactical Opportunity Within Hospitality SREITs

We were previously slightly cautious on OUE Hospitality Trust (OUEHT) given that their 2H18 results would face a high base effect, on the back of strong RevPAR performance in 2H17 and the Crowne Plaza Changi Airport (CPCA) income support recorded in 3Q17. However, following the recent rout, we upgraded the REIT from Hold to BUY on 20 Sept.

We believe OUEHT’s sharp unit price decline was prompted by concerns of an equity fundraising in the near term to fund the acquisition of one of its ROFR assets, Oakwood Premier, the serviced residence component of OUE Downtown.

We believe that

1. Oakwood Premier has not stabilized operationally and that
2. only a small placement vs. a larger rights issue will be needed in order for OUEHT to acquire Oakwood Premier given the likely asset size.

We also note that the ROFR for the larger retail portion of OUE Downtown is held by another party, not OUEHT. See our 20 Sept company report for more details.

OUE Hospitality Trust Is Our Top Pick

After the recent rout, with OUEHT’s unit price trading below book at ~0.9x FY18F P/B and a 7.3% FY18F and 7.5% FY19F dividend yield as at 9 Oct’s close. While we cannot rule out the possibility that OUEHT could acquire a sizeable non-ROFR asset (which may need rights issue, given OUEHT’s relatively high gearing of 38.7%), we believe there is nothing particularly suggestive of this right now to warrant such a sharp unit price decline.

Meanwhile, we believe Crowne Plaza Changi Airport is at the cusp of surpassing its minimum rent and with the opening of the nearby Jewel Changi Airport (expected end-March 2019), we see room for CPCA to contribute beyond this threshold.

While we now expect greater RevPAR growth pick-up in 2019 instead of 2H18, we believe there are selective opportunities with the hospitality subsector. Maintain NEUTRAL on the hospitality sub-sector.

Source: OCBC Research - 10 Oct 2018