OUE Hospitality Trust Preview

OUE Hospitality Trust ("OUE HT" or the "Trust") is offering a stapled unit of OUE H-REIT and OUE H-BT. The principal objective of the trust is to deliver regular and stable distributions to the holders. The preliminary prospectus can be found here.

The book building range is between $0.88 to $0.90 and the offer is for 681.818m units of which cornerstone will take 247.22m units, placement of 383.462m units and public offering of 51.136m units. The sponsor will still retain a 42.7% if all the green shoe option is exercised. (Not sure why need to book build such a small 'range'?!) There will be an over-allotment option of up to 68.182m units.

The tentative time table is as follows:

Bookbuilding: 10 Jul - 17 Jul

Public offer: 18 Jul - 23 Jul

Listing: 25 Jul

Initial Portfolio

The initial portfolio will comprise Mandarin Orchard Singapore and Mandarin Gallery. Both properties are located along Orchard Road. Both properties have a 99 leasehold starting from 1 July 1957! 

Distribution income composition

The chart below shows you the source of the distribution income with the majority contributed by the Mandarin Orchard Hotel and this is supported by the long term master lease agreement to provide stability to unit holders. It includes a variable rent component to capture any upside from the hotel business.

Pro-Forma Financial

Distribution yield

The projected distribution yield (annualised) is between 7.2% to 7.4% depending on the final offering price.

Future Pipeline

The sponsor has granted OUE HT the right of first refusal for future properties. Somewhat similar to FEHT. Example of the future pipeline below.

Cornerstone Investors

• Credit Suisse
• Goldhill
• Gordan Tang
• Lucille Holdings
• Spendid Asia Macro Fund

I would say that this is not a very strong set of cornerstone in that they are primarily high net worth, family office and hedge fund.

Peer Valuation

(sourced from Credit Suisse report Singapore REITs Sector dated 10 July 2013)

What i like about OUE HT

• Opportunity to "own" a property on Orchard Road (again). 
• Stable distributions from long term Master Lease Agreement for Hotel
• ROFR (Right of First Refusal) granted to OUE H Trust for future properties from OUE.
• Sponsor still own a 43% stake, ensuring alignment of interest. This is downsized from its original intention to retain only 30% stake, probably due to adverse market conditions.
• Experienced CEO, Mr. Chong Kee Hiong, former CEO of Ascott Residence Trust.

My Concerns

• Short remaining leasehold of 42 years. The 99 leasehold started from 1 July 1957. Not too sure what will happen thereafter.

My Valuation

Looking at the peer listing and where the majority income is coming from, i will compare it against other hospitality trusts. Based on the headline yield of between 7.2% to 7.4%, the yield compares favorably to Ascot Residence Trust and Far East Hospitality Trust but not against CDL HT and Ascendas HT. I will say that the trust is listing at "fair value" and upside may possibly be limited.

Assuming a trading range of between 6.5% to 7.5%, the price will probably trade between 86 cents to 99 cents.

Again, i will update on the Chilli ratings once the pricing is finalized in the coming weeks.