Stability anchors
The stability of OUEHT is anchored by the Mandarin Orchard Singapore (MOS) master lease and Mandarin Gallery (MG) retail segment. We estimate that c.70% of OUEHT’s FY14 revenue is fixed through its retail rent and fixed rent from a hotel master lease. This is higher than hotel peers such as CDLHT and FEHT, which has a near 50:50 split between hotel fixed and variable revenue, and a lesser proportion of retail. Additionally, it has minimal forex and interest-rate risks as all its assets are based in Singapore and it has hedged 100% of its debt (set to expire in 2016 and 2018).
Embedded organic growth
We expect revenue to grow organically by c.3% in FY14. This is largely led by MOS’s S$23.1m AEI, which will yield an additional 26 rooms and refurbish 430 rooms. The AEI will be sponsor-funded and completed in phases during FY14-15. So far, renovated rooms have registered 15% increment in room rates. We expect this to lead to 2% growth in RevPAR for FY14-15. There is embedded growth in MG’s rent as about 50% of the leases by NLA have step-up structures with annual step-up of c.4.7%.
Supply risk manageable
The upcoming supply of hotel rooms is a risk, but a manageable one, in our view, because 1) historical growth in supply has lagged behind demand, 2) upcoming supply is largely in the mid-tier segment and 3) supply is supported in the mid- to long-term by tourist arrivals . We have factored in 1% drop in occupancy for 2014 and 2015, which will be more than offset by an estimated 3% increment in average room rates.
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