SINGAPORE (Apr 4): RHB Research is keeping OUE Hospitality Trust as its top pick among hospitality REITs in spite of concerns over sponsor OUE’s proposed issuance of exchangeable bonds (EB), which has sparked a 7% fall in OUE H-Trust’s share price over the past month.
OUE last month proposed to issue $150 million exchangeable bonds due 2023, which bear interest at 3% per annum. These will be exchangeable into OUE H-Trust units at 95.7 cents each.
“We believe the market’s likely concerns about its sponsor’s issuance of EBs is unwarranted, as it would have no material impact on its underlying distribution per unit (DPU),” says analyst Vijay Natarajan in a report on Tuesday.
He adds that the EB will also have no dilution impact on OUE H-Trust’s net asset value (NAV).
In fact, the analyst says that the only outcome from the EB would be a potential reduction of the sponsor’s stake in OUE H-Trust to 29% from the current 37%, if fully exercised.
In addition, the analyst notes that OUE H-Trust’s exchange price is above RHB’s target price of 95 cents.
“Post the recent selldown, yields have become more compelling with FY18F-19F dividend yields of 6.7% and 7.2% respectively,” Natarajan says. “[The] recent selldown present buying opportunity.”
As such, RHB is keeping its “buy call on OUE H-Trust.
“Our channel checks indicate that demand for hotel rooms remains strong, with good response for the Singapore Airshow and growing passenger traffic at Changi Airport,” Natarajan says. “With hotel supply having peaked last year, we expect overall RevPAR to increase by 3-7% in 2018.”
At the same time, he notes that Mandarin Gallery has been “showing more resilience than expected,” with occupancy climbing 0.5 percentage points to 96.9% and rental growth of 3-4% in 4Q17.
Meanwhile, Natarajan says OUE H-Trust is also on the lookout for other suitable hospitality assets across key gateway cities. “Potential acquisition targets include its sponsor’s recently completed Oakwood Premier OUE Singapore (serviced residence), where occupancy is slowly ramping up,” he says.
As at 3.44pm, units of OUE H-Trust are trading flat at 79.5 cents, implying an estimated price-to-earnings ratio of 11 times, a DPS growth of 3.5%, and a dividend yield of 6.7% for FY18.
