• OUE Hospitality Trust's FY18 DPU of 5.14 Scts (-2.9% y-o-y) was in line with our expectations at 101% of our forecast.
• While its hospitality segment was impacted by lower banquet sales, revenue per available room (RevPAR) strengthened y-o-y.
• Maintain ADD and DDM-based Target Price on attractive yield.

FY18 DPU Performance in Line

• OUE HOSPITALITY TRUST (SGX:SK7)'s FY18 DPU of 5.14 Scts (-2.9% y-o-y) was in line with our expectations at 101% of our forecast. The decline in DPU was mainly due to the absence of income support for Crowne Plaza Changi Airport (CPCA) which was fully drawn down by 3Q17. This was partially offset by lower finance expenses.

Mandarin Orchard RevPAR Beat Competitors

• Mandarin Orchard Singapore’s (MOS) FY18 revenue declined 0.7% y-o-y to S$73.3m while 4Q18 revenue dropped 3.3% y-o-y to S$18.9m. The decline in topline was due to lower F&B sales on weaker banquet revenue, albeit partially mitigated by better performance from its F&B outlets. This offset the stronger RevPAR performance.
• FY18 RevPAR improved 1% y-o-y to S$226, mainly due to the strong 6.9% growth in 1Q18. In 4Q18, RevPAR improved 1.6% y-o-y, driven by higher occupancy and better demand from the transient and corporate segments.
• We understand that MOS's RevPAR growth, though minimal, still outperformed its peers'.

CPCA on Track to Achieve Variable Income

• As for Crowne Plaza Changi Airport (CPCA), the hotel was still receiving minimum rent from its master lessee in FY18. Nonetheless, its underlying operational performance has been improving, with y-o-y RevPAR growth of 2.1% to S$180 in 4Q18 and 7.7% to S$180 in FY18.
• With the ongoing ramp-up of Terminal 4 as well as opening of Jewel Changi Airport in 1H19, we believe CPCA will start to receive variable income in FY20F. It needs S$190 RevPAR to achieve variable income.

Mandarin Gallery Registered Negative Rental Reversion

• Retail revenue from Mandarin Gallery declined 2.4% in FY18 due to lower effective rent of S$22.5/sf/month (FY17: S$23.3). The asset's committed occupancy rose to 99.1% in Dec 2018 vs. 96.8% in Nov 2018, but it still reported a negative rental reversion of 8.9% in 4Q18 (-9.3% in 3Q18).
• 17% of Mandarin Gallery's net lettable area (NLA) is up for renewal in FY19; leases renewed year-to-date is good, according to management.

Maintain ADD on Attractive Yield

• We keep our DDM-based target price and ADD call in view of OUE Hospitality Trust's attractive dividend yield of more than 7% for FY19-21F.
• Potential re-rating catalysts are faster-than-expected earnings recovery by CPCA extension and the acquisition of new assets.
• Downside risks include slower-than-expected recovery in the Singapore hospitality market.

Source: CGS-CIMB Research - 30 Jan 2019