Is OUE Hospitality Trust A Falling Knife?

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As I write, on 15 December 2018, OUE Hospitality Trust (OUE H-Trust) is trading at S$ 0.68 per unit, the lowest since its IPO listing in 2013.

Source: Google Finance

Evidently, it crashed as the stock price has tumbled from S$ 0.89 in January 2018 to its lowest currently. Similar price patterns have occurred on other REITs related to the Riady Family namely: OUE Commercial REIT, Lippo Malls Indonesia Retail Trust, and First REIT. It seems that they are affected by the downgrade in credit ratings of Lippo Karawaci, a leading property conglomerate in Indonesia.

So, should we dismiss an investment into OUE H-Trust? Or, is it a bargain which is to be capitalised when the market is ‘running away’ from anything related to Lippo, OUE, and the Riady Family?

Well, the answer is a Yes if you are paranoidly concerned about the strength of a sponsor and its related companies. In other words, if you find that both Lippo Karawaci and OUE Ltd are fundamentally weak and worried about their impact towards OUE H-Trust, then, it is best to stay out of it. Remember: ‘A good night sleep is more desirable than 1-2% extra in yields in investment returns.’

However, to OUE H-Trust’s credit, it indeed owns prime landmark assets which are located at strategic locations in land-scarce Singapore. Thus, if you are into acquiring these assets at a discount, then, you may read further before making an investment decision on OUE H-Trust. Hence, here are 7 main things to know about OUE H-Trust before you invest.

#1: Mandarin Oriental Singapore (MOS)

MOS is the largest hotel in Orchard Road, featuring 1,077 rooms, 5 F&B outlets, and more than 30,000 sq. ft. of meeting & function spaces. It is valued at S$ 1.2 billion and has a remaining land lease period of 38 years. It is leased to OUE Ltd under a 15-Year Master Lease Arrangement which expires in July 2028 where it has a variable rent component comprising of:

– 33.0% of Gross Operating Revenue

– 27.5% of Gross Operating Profits

– Subject to Minimum Rent of S$ 45 million

Overall, MOS has generated stable net property income (NPI) between S$ 15 – 20 million per quarter since 2014, thus, is the largest contributor of income to OUE H-Trust presently.

Source: Quarterly Results of OUE H-Trust

#2: Mandarin Gallery (MG)

MG is a high-end retail mall located next to MOS valued at S$ 494 million. Like MOS, it has a remaining land lease period of 38 years. Generally, its leases will consist of:

– Base Rent

– Service Charge

– Advertising and Promotional Charges

– Turnover Rent when a predetermined gross sales turnover is achieved

– Period ranging 2 – 5 Years

MG’s contribution in NPI has dipped in 2018 as a result of the negative reversion of rents. It had brought in slightly above S$ 6 million in NPI a quarter over the last 9 months. As at 30 September 2018, MG’s committed occupancy rate has risen to 96.8%, up from 94.7% one year ago and has a weighted average lease expiry (WALE) of 3.6 years. Thus, they would provide some form of income stability to OUE H-Trust over the mid-term.

Source:  Quarterly Results of OUE H-Trust

Source: Investor Presentation Tokyo

Non-Deal Roadshow 27 November 2018

#3: Crowne Plaza Changi Airport (CPCA)

In January 2015, OUE H-Trust has acquired CPCA for S$ 290 million. Soon after, in 2016, it had acquired CPCA extension for S$ 205 million, which led to a one-off jump in NPI in Q3 2016. Presently, CPCA is worth S$ 497 million and has a lease land period of 66 years. It is leased to OUE Airport Hotel Pte Ltd (OUEAH) for a period of 15 years where its hotel is managed by InterContinental Hotel Group (IHG). The lease structure of CPCA consists of:

– 4% of Hotel’s Food & Beverage (F&B) Revenues

– 33% of Hotel Rooms and Other Revenues not related to F&B

– 30% of Hotel’s Gross Operating Profits

– 80% of Gross Rental Income from Leased Spaces

– Subject to Minimum Rent of S$ 22.5 million

Since Q3 2016, CPCA has contributed a stable S$ 4 – 5 million in NPI per quarter and thus, adding to income stability for OUE H-Trust.

Source: Quarterly Results of OUE H-Trust

#4: Group Financial Results

Overall, OUE H-Trust made a steady S$ 20 – 25 million in distributable income a quarter since 2014. For the last 12 months, it had paid out distribution per unit (DPU) of 4.98 cents. This is attributable to relative flat or stable performance of all of its properties discussed above.

Figures in S$ ‘000 unless stated otherwise

PeriodQ4 2017Q1 2018Q2 2018Q3 2018Total
Revenue33,80832,68230,73333,244130,467
Distributable Income
22,990

22,910

21,261

23,335

90,496
DPU (Cents)1.271.261.171.284.98

Source: Quarterly Results of OUE H-Trust

#5: Balance Sheet Strength

As at 30 September 2018, OUE H-Trust has total borrowings of S$ 867.5 million and thus, has a gearing ratio of 38.7%. Its average cost of debt is 2.4% per year and its weighted average debt maturity is 2.7 years. Presently, 71% of its debts are on fixed interest rates, thus, is ‘somewhat’ hedged against adverse changes in interest rates in the future.

Source: Investor Presentation Tokyo

Non-Deal Roadshow 27 November 2018

#6: Future Prospects

Singapore has experienced a continuous rise in tourist arrivals, particularly from the Asia-Pacific region over the past 15 years. It would be further boosted by:

– Enhance Flight Connectivity from Newark, New York City on October 2018

– Revamping of Orchard Road Shopping Belt

– Jewel Changi Airport to be opened in early 2019.

– Rejuvenation and Expansion of Mandai Precinct (Est. Completion: 2020)

– Sentosa Redevelopment  (Est. Completion: 2030)

The revamping of Orchard Road Shopping Belt would impact the performances of both MOS and MG. Meanwhile, there would be a pedestrian bridge to bring connectivity from CPCA to Jewel. Thus, these developments would bring rising footfall to all three properties in the future.

#7: Valuation

Based on its stock price of S$ 0.68 per unit,

Gross Dividend Yield

OUE H-Trust has paid out 4.98 cents in DPU over the last 12 months. Therefore, its gross dividend yield is 7.32% per year, close to its 5-Year Average of 7.25%.

Key Statistics (14 December 2018):

4-Year Net Dividend Yield Range: 6.05% – 8.51%

4-Year Net Dividend Yield Average: 7.25%

Current Net Dividend Yield: 7.32%

P/B Ratio

In Q3 2019, OUE H-Trust has a net asset value of S$ 0.76 per unit. Thus, its current P/B Ratio is 0.895, below its 5-Year Average of 0.959.

Key Statistics (14 December 2018):

4-Year P/B Ratio Range: 0.856 – 1.118

4-Year P/B Ratio Average: 0.959

Current P/B Ratio: 0.895

VIA’s Verdict

Should I invest in OUE H-Trust? Here, I’ll list down its pros and cons:

Pros:

– Prime Properties Located at Strategic Locations.

– Rising Tourist Arrivals into Singapore.

– Direct Beneficiary from the introduction of Jewel Changi Airport

– Downside Protection of Rental Income due to Minimum Rent

– Above 7% in Gross Dividend Yields & Below Average P/B Ratio.

Cons:

– No Acquisition of New Properties.

– Low Confidence in its Sponsor, OUE Ltd and the Riady Family.

– Negative Rental Reversion of Mandarin Gallery.

You’ll call the shots.

Ian Tai

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

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