The acquisition of Crowne Plaza Changi Airport Extension (CPEX) was announced together with 2QFY16 results. No change in guidance from Management from previous quarter – expect rates for the amalgamated hotel to be similar, but lower occupancy c.70% due to the larger inventory of 563 rooms (up from 320).
Not much change in strategy from previous quarter for Mandarin Orchard Singapore (MOS). Management maintained average daily rate (ADR) (S$240-S$250) to avoid a price-war on Orchard Road. Resultant occupancy was at lower end of 80% compared to high-80%, with revenue per available room (RevPAR) 8.3% lower y-o-y to S$200.
Historical ADR of c.S$260 at Crowne Plaza Changi Airport (CPCA) was lowered to S$250-range, successfully inching occupancy up. Consequent decline in RevPAR to S$225 was down only 2.6% y-o-y, faring better than MOS and the broader market. (CDREIT: -9.2% y-o-y; FEHT: -7.5% y-o-y, FHT: +5.7% y-o-y)
Tenant sales was -5% y-o-y for 1HFY16. Headline rental reversion of -17% was mainly due to adoption of lower base rent and higher turnover rent component for some leases. Moreover, this accounted for only 5% of net lettable area (NLA). Remaining expiries in 2016 account for only 6% of NLA.
Gross revenue for MG had been negatively impacted due to absence of rent collected during the landlord fit-out period for Michael Kors and Victoria’s Secret. The 7 and 10-year leases for Michael Kors and Victoria’s Secret respectively at Mandarin Gallery (MG) have now started; currently in tenant fit-out period and actual cash flow will come in 3QFY16 and 4QFY16 respectively. While Michael Kors and Victoria’s Secret will occupy c.5% and c.10% respectively of MG’s NLA, Management highlighted that they will disproportionately account for c.30% of MG’s gross revenue together. This is because they will both be at street-facing units on the street-level, which commands the highest rents on Orchard Road. We view this positively, as these two prominent tenants will contribute significantly to MG on multi-year leases from FY17 onwards.
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Peer relative valuation
OUEHT is trading slightly above the peer average P/NAV and with a higher 12M trailing yield than the peer average.