Friday, March 13, 2015

OUE Hospitality Trust - More growth expected

What Happened 
We recently hosted OUE Hospitality Trust’s (OUEHT) NDR in KL. During the meetings, some of the issues addressed included 1) the thinking behind the acquisition of Crowne Plaza at Changi Airport (CPCA) and the upcoming Crowne Plaza Extension (CPEx), 2) operational risks to the REIT in a rising interest rate environment and 3) outlook for the hospitality sector in Singapore. 

What We Think
At S$290m for CPCA (320 rooms) and S$205m for CPEx (243 rooms), these prices translate to an initial yield of c.4.5%. On the back of high occupancy (c.90%) and an average room rate of S$265/night at CPCA, management is confident that CPEx will drive earnings when it is acquired in 4Q15-1Q16. An income support of S$7.5m to be drawn down over three years for CPEx will provide further stability to the REIT. Aside from offering diversity of assets within the portfolio, we view these acquisitions positively as the hotel is well positioned to reap growing demand in the vicinity when the surrounding projects (e.g., the upcoming mall at Changi Airport, Terminal 4 and Terminal 5) begin operations amid limited upcoming supply in the Changi airport area (currently only a 130-room hotel is planned for the area). With current leverage at c.41%, some capital is expected to be raised to fund CPEx. Having said that, the REIT manager reemphasised that the acquisition of both parts of the hotel will be yield accretive. Aside from CPEx, the serviced apartment at OUE Downtown could be the next acquisition target. Amid a more positive 2015 outlook for Singapore’s tourism landscape, Mandarin Orchard and Mandarin Gallery are expected to deliver stable earnings in FY15. Furthermore, with c.100% of debt at a fixed rate and only S$290m of interest swaps due in Jul 15, OUEHT’s debt management is stable with interest cost expected to rise marginally when the swaps are renewed. 

What You Should Do
On the basis of a stable outlook coupled with further room to grow inorganically, while being well-shielded from a potential hike in interest rates, we keep our Add call with an unchanged target price of S$1.01.

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