In the last part of this 4-part series, we focus on three REITs that underperformed in the latest quarter. But while these three REITs failed to bring any cheers to investors in 1Q19, analysts believe that the medium term outlook for these REITs remain bright.
Investors Takeaway: 3 Underperforming REITs With Better Mid-term Outlook
- Suntec REIT
Despite lower gross revenue and net property income, Suntec REIT managed to come in line with consensus expectations as higher associate and JV contributions, greater finance income and capital top-up helped Suntec REIT to put in a decent 1Q19 performance. The fall in gross revenue was due to lower convention income as Suntec REIT took a hit from fewer convention events being hosted in the last quarter. Higher sinking fund contribution also drove net property income lower.
On the office side of things, Suntec REIT continues to benefit from the rising office cycle. As such, Suntec REIT saw a slight improvement in revenue as replacement leases secured in prior quarters commenced operations. Retail revenue from Suntec Mall also improved on higher rents and occupancy. Suntec REIT has been carrying out reconfiguration works to convert five shop units at the basement of Suntec Mall into multi F&B concepts. The slated completion is in July 2019, which should drive footfalls as well as shopper spend.
1Q19 Performance Rating: B; BUY, TP $2.06
- OUE Hospitality Trust
OUE Hospitality Trust closed the first quarter of 2019 with DPU of $0.0118. This was down 7.8 percent quarter-on-quarter, which was largely expected as hospitality revenue fell due to a decline in RevPAR. In particular, Mandarin Orchard Singapore underperformed with an 8.9 percent year-on-year RevPAR decline as it saw lower average room rates from slowing demand in the corporate and wholesale segments. The absence of biennial events like the Singapore Airshow also affected tourist arrivals.
The underperformance of Mandarin Orchard was picked up by stronger retail revenue from Mandarin Gallery, thanks to higher average occupancy. This was coupled with lower property expenses, leading to net property income improving by 2.5 percent. The opening of Jewel near Crowne Plaza Changi Airport is also a positive sign for OUE Hospitality Trust as CIMB expects Jewel to help drive RevPAR for Crowne Plaza Changi Airport.
Despite the fall in hospitality revenue, CIMB continues to maintain its BUY call on OUE Hospitality Trust as the completion of the merger with OUE Commercial Trust continues to pend completion. Unitholders of OUE Hospitality Trust can expect to receive cash of S$0.04075 and 1.3583 new OUE Commercial Trust units for each OUE Hospitality Trust unit owned. The proposed merger will likely be approved at their respective EGMs scheduled in June 2019. The expected completion will be set for August 2019.
1Q19 Performance Rating: B-; BUY, TP$0.85
- CDL Hospitality Trusts
CDL Hospitality Trusts saw its 1Q19 fall below street expectations as the decline in RevPAR drove down net property income. While it was partially offset by inorganic contribution from Hotel Cerretani Florence and better performance of Pullman Hotel Munich, overall income available for distribution fell 14.4 percent year-on-year. Moving forward, the management has reduced its industry RevPAR growth forecasts for 2019 from 3-5 percent to 1-3 percent.
Despite a poorer than expected quarter, CIMB has singled out CDL Hospitality Trusts as a high conviction buy. One of the reasons for the high conviction recommendation is that CIMB expects CDL Hospitality Trusts to have a stronger 2H19 as the Orchard Hotel refurbishment completes and robust performance from its overseas hotels continue.
1Q19 Performance Rating: C+; BUY, TP $1.85