Stronger than expected performance
OUE Hospitality Trust (OUEHT) declared 1.72 S cts DPU for 3Q15, ahead of 3Q14 (1.64 S cts) and 2Q15 (1.52 S cts). This was driven by higher revenues of S$32.7m (10.4% higher QoQ) and higher NPI of S$28.8m (11.6% higher QoQ), mainly due to stronger performance at Mandarin Orchard Singapore (MOS). At FY16F 7.8% yield, OUEHT begins to look interesting if the performance can be sustained.
Reversing the RevPAR freefall
After 2 quarters of disappointment, OUEHT came out ahead of our expectations as MOS reported a higher YoY RevPAR of $243 (3Q14: $241). The results are bolstered by OUEHT's efforts in targeting the leisure travel and group business. MOS holds the advantage with its size (1077 rooms), which allows the flexibility to attract large businesses. In addition, MOS differentiates itself with its good location (Orchard) and competitive rates.
Better CPCA performance
Crowne Plaza Changi Airport (CPCA) performed better QoQ, with NPI increasing to S$3.4m (2Q15: S$3.1m). Contribution may continue to increase as the acquisition of the extension to CPCA is expected to be completed next year.
Stable performance at Mandarin Gallery
Mandarin Gallery (MG) rents increased to S$25 psf pm (3Q14: $23.9). Yet, occupancy dipped to 98% due to the large number of lease expiries, with 21% leases by gross rent expiring by end-2015. However, we are not overly concerned as performance at MG has been good. Some near-term volatility is expected as tenants take time to renew and new tenants require fit out periods.
Upgrade to BUY with stabilization of performance
We upgrade OUEHT to BUY, given the high FY16F dividend yield of 7.8%. We increased our TP to S$0.83 after decreasing our cost of equity by 33bp to 8%. This partially reverses the 50bp increase we made in 2Q as the stabilization in RevPAR alleviates our concerns on the freefall in 1Q15-2Q15 performance. While we maintain the view that a potential equity raising is in the cards to acquire the extension of CPCA, the correction in share price offers an entry point into the stock. We see upside risks as we already accounted for a weak hospitality outlook, if MOS can maintain its 3Q15 RevPAR performance. (Read Report)
Read Related Reports
1) OUE Hospitality Trust - 9M15 below, RevPAR marginally higher YoY while retail reversions slow by Credit Suisse Asia Pacific Equity Research, published on 13 November 2015
2) OUE Hospitality Trust - Is The Strong RevPAR Sustainable? by RHB Research, published on 13 November 2015
Source : KGI Fraser Research