• Path of RevPAR growth lies ahead
• Unit price decline too steep
• 7.5% FY19F yield as at 8 Nov close

Expect 2019 to be Strong Year for SG Hospitality

OUE Hospitality Trust’s (OUEHT) 3Q results were in-line, albeit on the lower end. As noted previously, we expected 2H18 results to look weak on a YoY basis. Gross revenue dropped 2.2% YoY to S$33.2m, with hospitality revenue down 2.7% YoY and retail revenue down 0.9%. 3Q DPU dropped 5.9% to 1.28 S cents or 25.4% of our initial full-year forecast, mainly because OUEHT no longer receives CPCA income support, partially offset by lower interest expense.

3Q RevPAR for Mandarin Orchard Singapore was down 3.7% on the back of lower ADR relative to the high base last year. This high-base effect was exacerbated by the cancellation of certain Japanese tour groups on the back of the Osaka typhoon this quarter. Meanwhile, RevPAR for CPCA was up 6.3% YoY as the asset continues to stabilise.

Going forward, we note that CPCA is close to reaching the threshold for minimum rent, and expect it to surpass this threshold next year especially after Jewel Changi Airport opens. We continue to expect 2019 to be a strong year for Singapore hospitality. After adjustments, our fair value remains at S$0.79.

Likely Not Oakwood Premier, But Third-party Assets

Recall that our base case is that OUEHT will not pursue an acquisition of its ROFR-asset Oakwood Premier in the near-term (see our 20 Sept report). Furthermore, we highlight that the ROFR for Downtown Gallery is held by OUE Commercial Trust, not OUEHT. On the other hand, we believe it is more likely that the REIT will pursue thirdparty acquisitions overseas.

In this case, given the high gearing (38.7% as at 30 Sept 2018), such acquisitions would likely require at least partial equity financing. That said, given the wide variety of assets available overseas, we believe that deals pursued will likely be at least “DPU neutral” for unitholders, i.e. additional income from asset will offset the enlarged unit base and any associated increase in interest costs.

Attractively Priced as at 8 Nov 2018

Meanwhile, the REIT has corrected 7.4% since the announcement of OUECT’s dilutive rights issue, 5.7 ppt below the total return of the FSTREI. We upgraded OUEHT from Hold to BUY on 20 Sept, on the back of OUEHT’s dramatic share price decline. Since then, it has outperformed the FSTREI by 2.4 ppt.

As at 8 Nov’s close, OUEHT is trading at a 7.5% FY19F yield, ~70 bps and ~120 bps above FEHT’s and CDLHT’s respectively, as well as near its historical average since listing despite having a rosier outlook than before. We continue to find the REIT’s current price very attractive. We maintain BUY on OUEHT with a $0.79 fair value.

Source: OCBC Research - 9 Nov 2018