Cash cows: OUE HT rides on Orchard road hospitality boom

But land lease threat looms over exceptionally high yields.

OUE Hospitality Trust is milking its prime Orchard Road assets for all they’re worth. The trust is expected to ride on Orchard Road’s steadily growing hospitality segment, according to Maybank Kim Eng.

OUEHT offers a FY14E DPU yield of 7.3%, the highest among Singapore-based hospitality and retail S-REITs.

OUE HT’s upscale Mandarin Orchard Singapore hotel, which provides 70% of the trust’s income, is expected to rake in profit from the leisure, business and medical tourism wave.

On the other hand, high-end fashion mall Mandarin Gallery has carved out a distinct identity of its own, providing it with a source of competitive advantage over other malls.

According to Maybank Kim Eng, “We project a DPU yield of 7.3% for FY14E. OUEHT has one of the highest DPU yields among the Singapore-based hospitality and retail S-REIT This compares favourably with hospitality REITs’ FY14E DPU yield of 6.8% and FY14E-15E DPU CAGR of 1.6%. At our TP, OUEHT offers a 7.0% FY14E DPU yield. OUEHT is also the only trust with pure Orchard Road play.”

Here’s more from Maybank Kim Eng:

Short remaining land lease. The leasehold title for Mandarin Orchard Singapore and Mandarin Gallery is held under a single title with the remaining lease period of ~42 years.

The land lessor and reversionary owner is Ngee Ann Kongsi, whom OUEHT has to yield possession of both
assets when the term ends. There is no guarantee that OUEHT is able to obtain a grant of new leasehold title to its portfolio.

To obtain a grant of a new leasehold title, OUEHT may incur a substantial cost. In our dividend
discount model, we forecast OUEHT’s DPU to grow at 1.5% constant growth annuity from FY21E until FY56E.

Implicitly, the properties are assumed to depreciate to zero value at the end of the head lease.
Single-asset concentration risk.

There is no geographic or market diversification. An economic downturn in Singapore or more specifically at
Orchard Road will have an adverse effect on the performance of OUEHT. Hospitality sector susceptible to economic risks.

The hospitality-related industries are cyclical and sensitive to external and economic changes. As such, adverse changes could impact OUEHT’s operations and financial performance.