Highlights
Results in line. OUE HT reported 1Q14 revenue of S$29m (+1% vs IPO forecast), NPI of S$26m (+3%) and distributable income of S$22m (+4%). The higher revenue and NPI were attributable to better performance of the hotel component, as well as savings in property expenses from the Mandarin Gallery, with NPI margins for the mall rising slightly to 76% from 75%. DPU of 1.68Scts was 4.3% higher than forecast, with the additional boost derived from lower trust expenses.
Our View
Shift to corporate segment led to lower RevPAR but higher F&B contribution. 1Q14 RevPAR of S$248 was 5% lower than FY14 estimate of S$257, a result of lower number of Indonesian guests due to the April election and this contributed to a decline in the proportion of transient guests. This was mitigated in part by higher demand from the corporate and wholesale segment, especially during the February Air Show. The hotel’s strategy to target corporate demand has met with some success in terms of achieving better hotel occupancies and higher F&B revenue as a result of more corporate meetings within the
hotel. Looking ahead, we expect to see a dip in transient guests due to competition from Traders Hotel which will open later this year. We are confident however, that the Manager will be able to sustain higher corporate demand given the robust MICE calendar for the rest of 2014.
Renewing retail leases a key risk. Although only 9% of retail leases by gross revenue are coming up for renewal in FY14, 88% of leases will expire over FY15/16. While occupancy cost remains stable at c.20%, the key challenge for the Manager would be to balance tenant retention with refreshing trade mix, to maintain its position as a niche mall within the Orchard Road area.
Recommendation
Maintain BUY, TP S$0.95. OUEHT currently offers investors yields of 7.8%-8.1%, which is one of the highest among the hospitality SREITs. We like the stock for its high fixed income component (70% p.a.), which provides a stable minimum yield of 4.4-4.6% while having room for upside. We maintain BUY, TP S$0.95.
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