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3 Reasons Why I Will Not Invest In OUE Hospitality Trust Even Though It Has A 6% Yield

OUE Hospitality Trust (SGX: SK7), or OHT for short, is a stapled trust that owns three properties in Singapore. They are Crowne Plaza Changi Airport hotel, and the connected Mandarin Orchard Singapore hotel and Mandarin Gallery retail mall. The trust was listed in 2013 and is sponsored by OUE Ltd (SGX: LJ3).

Currently, the trust has a commendable distribution yield of around 6% and its units have appreciated by some 24% in the last 12 months. Despite these, I feel OHT has a few factors that make it a risky investment, limiting its future growth.

High gearing ratio

The gearing ratio is a comparison of the trust’s total debt against its assets. The lower the gearing ratio, the better as it means that the trust is sustainably leveraged. In Singapore, REITs have a regulatory gearing limit of 45%.

As of 31 December of 2017, OHT had a gearing ratio of 38.8%. This is considerably close to MAS regulatory limit. To put this into perspective, OHT has the 7th highest gearing ratio among the 39 property trusts and REITs in Singapore.

The high gearing ratio leaves little room for the trust to expand its portfolio through debt. Because of that, I do not see OHT being able to expand beyond its current portfolio, except through a secondary offering.

Concentrated portfolio

OHT’s portfolio consists of just three properties, all located in Singapore. Because of the geographical concentration, any macroeconomic headwinds within the country will have a major impact on the profitability of the trust.

Furthermore, Mandarin Orchard Singapore alone contributed 60% of total net property income in the 2017 financial year. The trust is, therefore, highly dependent on the performance of this one property. If the property underperforms or needs to go through renovation, the overall performance of OHT would be affected.

Challenging local retail scene

The retail scene in Singapore has also come under pressure from technological disruptions and new shopping malls. Mandarin Gallery has been affected by the challenging retail climate as rental reversions declined 12% and retail net property income dropped by 15.7% in 2017. Considering that Mandarin Gallery accounted for 21% of 2017 net property income, a further decrease in its performance can have a major impact on the overall profitability of the trust.

The Foolish bottom line

OHT is one of the many real estate trusts in Singapore. Despite it having a reasonable yield, I am concerned by the high gearing and concentrated portfolio of the trust. Furthermore, with the challenging retail scene in Singapore, the trust may face further macroeconomic headwinds that may further decelerate its growth in the future.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.