OCBC upgraded OUE Hospitality Trust to Buy from Hold, saying the unit price is “too cheap to ignore” after its sharp drop this month following the announcement of OUE Commercial Trust’s plans to acquire OUE Downtown’s office components via a rights issue.
“We believe OUEHT’s sharp unit price decline was prompted by concerns of an equity fundraising in the near term to fund the acquisition of one of its ROFR assets, Oakwood Premier, the serviced residence component of OUE Downtown,” OCBC said in a note on Thursday. ROFR stands for right of first refusal.
But OCBC said it expected that Oakwood Premier, which started operations in January 2017, hasn’t yet reached optimal occupancy levels and would need more time to stabilize before being offered for sale.
“Even if OUEHT does acquire Oakwood Premier, we believe it is more likely to conduct a placement as opposed to a rights issue given the size of the potential acquisition,” it said. “In any case, current conditions do not seem particularly ripe for equity financing after the recent rout, with OUEHT’s unit price trading below book.”
OCBC said its base case was that OUE Hospitality Trust would not pursue an acquisition of Oakwood Premier in the near term.
It estimated the valuation of Oakwood Premier at around S$1 million to S$1.2 million on average per key, or S$268 million to S$322 million, in total.
For other OUE Hospitality Trust properties, OCBC noted that the Mandarin Orchard Singapore face a high revenue per available room (RevPAR) base in the third quarter, as it would be compared with the year-earlier period, which had income support.
But it said 2019 prospects appeared bright, adding that with the opening of the Jewel Changi Airport, expected at the end of March, the Crowne Plaza Changi Airport was “at the cusp” of surpassing its minimum rent.
OUE Hospitality Trust’s unit are trading at a 2018 yield of 7.3 percent and 2019 yield of 7.5 percent, OCBC said.
“We find the REIT to be very attractively valued,” it said.
It kept its fair value unchanged at S$0.79.
The unit was up 0.72 percent at S$0.695 at 11:59 A.M. SGT.