SINGAPORE (May 3): Analysts are staying the course on OUE Hospitality Trust (OUE H-Trust), on the back of strong revenue per available room (RevPAR) growth in its hospitality segment, and a potential recovery for its retail segment.
OUE H-Trust reported a 1.9% increase in gross revenue to $32.7 million for the 1Q18 ended March, driven by higher master lease income from Mandarin Orchard Singapore (MOS).
However, distribution per stapled security (DPS) fell 3% to of 1.26 cents in 1Q18, on the absence of income support for Crowne Plaza Changi Airport (CPCA), which was fully drawn down by 3Q17.
Meanwhile, retail revenue from Mandarin Gallery (MG) decreased 3.3% due to lower effective rents.
But analysts believe OUE H-Trust is likely to stand tall amid market challenges.
“OUEHT posted a strong all-round performance, with healthy RevPAR growth for its hotels and a higher occupancy rate at its retail mall. We expect this trend to continue in 2018, with the limited supply of new hotels and continued momentum in visitor demand,” says RHB Research analyst Vijay Natarajan in a Thursday report.
“Corporate demand is also expected to trend higher, on the back of more MICE events and a positive economic growth outlook,” he adds.
RHB is keeping its “buy” call on OUE H-Trust with an unchanged target price of 95 cents.
OCBC Investment Research lead analyst Deborah Ong notes that MOS saw RevPAR growth of 6.9% in 1Q18, while CPCA clocked RevPAR growth of 13.6% on the back of a higher occupancy rate, which it is still ramping up.
She point out that these are higher than the RevPAR growth at CDL Hospitality Trusts’ and Far East Hospitality Trust’s Singapore hotels, which rose by 0.8% and 3.3%, respectively.
“We generally expect to industry-wide RevPAR growth to accelerate further in coming quarters, though we also note that OUEHT has set a high threshold for itself given the growth it already clocked in 2H17,” says Ong.
OCBC is keeping it “hold” call on OUE H-Trust with an unchanged fair value estimate of 84 cents.
Meanwhile, CIMB Research lead analyst Yeo Zhi Bin opines that OUE H-Trust’s retail rental reversions have bottomed.
“Encouragingly, the REIT achieved positive rental reversion of 2.2% for base rent for leases signed in 1Q18 (for close to 3% of the net lettable area). This was the second consecutive quarter of positive reversion from retail,” Yeo says.
CIMB is keeping its “add” recommendation on OUE H-Trust with an unchanged target price of 92 cents.
The way RHB’s Natarajan sees it, the positive rent reversion “indicates that efforts to reposition the mall’s tenant mix are starting to bear fruit”.
“About 13% of leases are due for renewal for the remainder of the year, for which we conservatively expect a flat rental reversion,” he adds. “As there is minimal supply of new malls in the Orchard area, we expect the occupancy to remain healthy at current levels.”
At the same time, the analyst believes that OUE H-Trust could likely see some acquisitions in the near-term.
“A potential acquisition target is the recently-completed Oakwood Premier OUE Singapore (serviced residences), where occupancy is slowly ramping up. Management is also on the lookout for other suitable hospitality assets across key gateway cities,” Natarajan says.
Having recently refinanced all of its $859 million of debts, the analysts also opine that OUE H-Trust is well-positioned amid the threat of rising borrowing costs.
“We believe that higher contributions from MOS and lower borrowing costs could offset the absence of income support,” says CIMB’s Yeo.
As at 12.05pm, units of OUE H-Trust are trading 1 cent lower at 81 cents. According to CIMB valuations, this implies a price-to-earnings ratio of 18.7 times and a dividend yield of 6.3% for FY18.
