3 Things Investors Should Know About OUE Hospitality Trust

Credit: Simon Cunningham

OUE Hospitality Trust (SGX: SK7) is a stapled-trust (comprising of a real estate investment trust and business trust) that focuses on investing in real estate used for hospitality and/or hospitality-related purposes.

The properties currently under the stapled trust are two hotels (Mandarin Orchard Singapore and Crowne Plaza Changi Airport) and a high-end retail mall (Mandarin Gallery). The two Mandarin-branded properties are located along Singapore’s famous shopping belt, Orchard Road, and are actually connected to each other.

OUE Hospitality Trust has a distribution yield of 8.3% right now, which is one of the highest in Singapore’s universe of REITs. Investors may be curious about the trust as a result. So, here are three important things about OUE Hospitality Trust’s business that investors may want to pay attention to:

1. No growth in 2016 so far

Source: OUE Hospitality Trust 2016 third-quarter earnings presentation

The table above shows how OUE Hospitality Trust’s business has performed in the first nine months of 2016. We can see that its gross revenue, net property income, and distributable income are all lower when compared to the same period in 2015.

But, the declines in those three figures are ‘only’ in the single-digit percentages – the trust’s distribution per stapled security for the first nine months of 2016 is actually down by 33% year-on-year mainly due to a higher securities count after a rights issue in April 2016.

OUE Hospitality Trust’s lack of growth is primarily driven by weak performance from its retail portfolio.

2. The occupancy rate and average room rate

The occupancy rate is an important metric to look at since it gauges the strength of the market demand for a trust’s properties.

Mandarin Gallery reported an average occupancy rate of 89% in the third-quarter of 2016; this is a big step-up from the 79.1% seen in the previous sequential quarter. The retail mall’s occupancy suffered in the second-quarter of 2016 due to fit out periods for incoming tenants.

As for the weighted average lease expiry (by gross rent), Mandarin Gallery has 4.4 years under its belt as of 30 September 2016.

Elsewhere, during the third-quarter of this year, Mandarin Orchard Singapore recorded a RevPAR (revenue per available room) of S$224, down from the S$243 seen in the same period a year ago.

3. Level of concentration in assets and rental income

Having a diversified portfolio helps to lessen concentration risk for a trust.

In the case of OUE Hospitality Trust, it is both concentrated and diversified. Sounds contradictory? Here’s why:

Source: OUE Hospitality Trust 2016 third-quarter earnings presentation

We can see that some 54% of OUE Hospitality Trust’s asset value comes from just one property, Mandarin Orchard Singapore. But, the trust also has a diversified customer profile for both its hospitality as well as retail portfolio.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.