OUE Hospitality Trust

OUE Hospitality Trust: CS and DB initiated on OUE H Trust, both with a BUY call and TP of $1.04 and $0.94 respectively. OUE Hospitality Trust (OUEHT) offers unique exposure to prime hospitality and retail in Singapore through Mandarin Orchard (MOS), the largest hotel on Orchard Road, and the adjoining Mandarin Gallery (MG). Growth is supported by the MOS refurbishment and reversions at MG, a visible sponsor acquisition pipeline and recovery in prime retail rents in the longer term. DB forecast DPU growth of 2.0% in FY13 and 5.3% in FY14. For MOS, the additional 26 rooms and refurbishment programme should help boost room rates and narrow the RevPAR gap to the sector. Average rents at MG are expected to register a two-year CAGR of 5.4% following the first renewal cycle last year, supported by above-average shopper traffic (+7.7% in FY12) and tenant sales (+5.1%) with longer-term cyclical recovery potential. OUEHT’s hotel master lease agreement and rental for MG together account for 71% of FY13E NPI. Leasing risk for MG is limited with 0.9% and 19.8% of NLA expiring in 2013 and 2014; 47% of leases have step-ups, with a weighted average step-up of 5.5% p.a. OUEHT has a right of first refusal (ROFR) over the Sponsor’s hospitality assets. Three assets have been identified that could double OUE’s room stock. Crowne Plaza Changi Airport could be the first to be acquired, which could result in 1-3% accretion to its FY14E DPU. The Sponsor has a good track record in repositioning and growing assets. OUE H Trust has an attractive 7.6% FY14E yield implies a 490bps spread over the 10-year government bond.