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Latest Earnings from OUE Hospitality Trust: Some Challenging Times Are Ahead

OUE Hospitality Trust (SGX: SK7) released its second-quarter earnings yesterday evening. The reporting period was for 1 April 2016 to 30 June 2016.

As a brief background, OUE Hospitality Trust is a stapled trust that invests in hospitality-related assets and retail malls. Its portfolio currently consists of three properties, namely, Mandarin Orchard Singapore, Crowne Plaza Changi Airport, and Mandarin Gallery. The first two are hotels while the third is a high-end shopping mall.

With that, let’s dive into the trust’s financial results.

Financial highlights

Here are some of OUE Hospitality Trust’s latest financial figures:

  • Revenue for the reporting quarter fell by 9.2% year-on-year to S$26.9 million while net property income (NPI) also declined by 10.2% to S$23.2 million.
  • Consequently, the trust’s income available for distribution and distribution per stapled security (DPS) sank by 18% and 39.5%, respectively. Income available for distribution came in at S$16.6 million while DPS clocked in at 0.92 Singapore cents.
  • The trust ended the second-quarter of 2016 with a net asset value (NAV) per stapled security of S$0.79, a sharp 12.2% decrease from the S$0.90 seen a year ago.

The revenue decline experienced by OUE Hospitality Trust was attributed to lower contributions from both the hospitality and retail segments. In addition to the lower revenue, the trust’s distribution was also affected by a 24% increase in finance expenses.

If you’d notice, the trust’s DPS had declined at a much faster rate than the income available for distribution. This is due to the creation of new stapled securities as a result of a rights issue launched by OUE Hospitality Trust in March this year.

The rights issue was carried out to finance the acquisition of Crowne Plaza Extension. The acquisition had increased the total room inventory of Crowne Plaza Changi Airport from 320 to 563.

On the balance sheet front, here are some important figures to look out for:

OUE Hospitality Trust debt profile
Source: OUE Hospitality Trust’s earnings presentations

From the table above, it can be seen that OUE Hospitality Trust’s interest cover ratio and funding costs have both taken a step back. But there are also positives. The trust’s gearing as well as total debt have declined substantially.

The trust also revealed that 90% of its borrowings have fixed rates; this can provide the trust with some buffer from any short-term increases in interest rates.

Operational highlights

In the Hospitality Segment (which consists of Mandarin Orchard Singapore and Crowne Plaza Changi Airport), the revenue per available room (RevPAR), had declined by 6.8% year-on-year during the quarter to S$206.

Mandarin Orchard Singapre had the poorer showing as its RevPAR dropped by 8.3% to S$200. Crowne Plaza Changi Airport’s RevPAR slipped by only 2.6% to S$225.

The various RevPAR numbers could be important for investors to note as they affect the master lease income OUE Hospitality Trust receives from the two hotels. In the second-quarter of 2015, master lease income from Mandarin Orchard Singapore was S$1.2 million lower; the master lease income from Crowne Plaza “was marginally lower.”

In the earnings release, OUE Hospitality Trust had commented on Mandarin Orchard Singapore’s competitive landscape:

“The increase in rooms supply in Singapore has also created a highly competitive market environment for business from all segments. The decrease in room sales was partially mitigated by an increase in food and beverage sales due to higher patronage at the food and beverage outlets.”

The road ahead

On the outlook for Mandarin Orchard Singapore, the following is what OUE Hospitality Trust has to say:

“The asset enhancement programme for Mandarin Orchard Singapore [MOS]will continue in 2016. More than 350 out of the 430 guest rooms to be renovated have been completed.

MOS’ Shisen Hanten by Chen Kentaro, has been awarded two stars in the inaugural Michelin Guide Singapore 2016 – Singapore’s first-ever list of Michelin hotels and restaurants. The accolade makes Shisen Hanten by Chen Kentaro the highest Michelin-rated Chinese restaurant island-wide. This is expected to increase interest in the restaurant and boost patronage.”

As the trust is in the hospitality sector, its business could also be affected by tourism activity in Singapore. Here is what OUE Hospitality Trust has to say about tourism:

“Singapore Tourism Board (“STB”) reported a 13.3% year-on-year increase in international visitor arrivals in the first five months of 2016. Despite the higher visitor arrivals, Singapore hotel year-to-date May RevPAR was 0.8% lower than the same period last year.

Against the backdrop of a subdued global and local economy, the tourism industry continues to face headwinds in the near term as consumers and corporates are likely to be conservative in their travel expenditures.

The increased rooms supply in Singapore had created a highly competitive market environment and this would likely persist. To support the tourism industry and in an effort to boost tourism in the short term and long term, the Singapore government has set aside $700 million in a Tourism Development Fund to be invested from 2016 to 2020.”

The trust also warned about a challenging retail environment in the earnings release. In addition, it said that “Mandarin Gallery is expected to record lower average occupancy in FY2016” because of slower lease renewals and more fit-out periods.”

But, OUE Hospitality Trust also shared some positives about its retail mall:

“Michael Kors and Victoria’s Secret are expected to open in 3Q2016 and 4Q2016 respectively, and both tenants account for approximately 15% of the mall’s net lettable area.

Although [the trust’s] retail segment income is impacted in 2016 by the lower rental contributions due to longer fit-out periods by the landlord, the strategy to sign strong tenants for longer lease periods (seven years for Michael Kors and 10 years for Victoria’s Secret) will benefit [the trust] through enhanced income stability in the long run.”

OUE Hospitality Trust’s securities closed at a price of S$0.71 yesterday. At that price, the trust is valued at 0.9 times book value.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Esjay does not own shares in any companies mentioned.