Singapore Hospitality Sector - OCBC Investment 2017-12-01: 3Q17 Recap – Rich Valuations

Hospitality Sector - OCBC Investment 2017-12-01: 3Q RECAP – Rich Valuations Singapore Hospitality Sector Singapore REIT 2018 Outlook CDL HOSPITALITY TRUSTS J85.SI FAR EAST HOSPITALITY TRUST Q5T.SI OUE HOSPITALITY TRUST SK7.SI ASCOTT RESIDENCE TRUST A68U.SI

Hospitality Sector - 3Q RECAP – Rich Valuations

  • 2018 looks to be a good year.
  • 5.8% to 6.3% FY18 yields.
  • Potential catalyst: Garden Southern Waterfront.



SG RevPAR growth from -1.4% to 8.0%.

  • For the counters we cover, YoY growth in 3Q17 Hotel RevPAR ranged between -1.4% to 8.0% while 3Q Serviced Residences RevPAU – which is more dependent on corporate demand – fell 9.9% YoY for Ascott Residence Trust’s (ART) SG-based SR portfolios and 3.4% YoY for Far East Hospitality Trust (FEHT)
  • On the whole, 9M17 DPU growth ranged from -19.0% to 19.1% YoY while 3Q17 DPU ranged from -28.1% to 10.6%, with OUE Hospitality Trust (OUEHT) posting the greatest gain for both periods while Ascott Residence Trust (ART) was affected by the time lag between its rights issue and Ascott Orchard Singapore acquisition.
  • Given the improving supply-demand dynamics, we are generally optimistic about RevPAR growth in 2018, especially the second half. From our channel checks, there finally seems to be a slight pick-up in corporate demand, with more requests for proposals and corporate enquiries for function rooms and activities recorded. Yet, we do not find that unit prices of REITs under our coverage are compelling.
  • Hospitality REITs under our coverage are currently trading at FY17 dividend yields of 5.3% to 6.3% and FY18 yields of 5.8% to 6.3%.


Potential catalyst for Singapore pure-plays? 

  • We believe Singapore pure-plays OUEHT and FEHT stand to benefit the most from an uptick in either operational prospects and/or sentiment locally. 
  • Notably, one potential catalyst for a rerating could be an announcement of any upcoming lifestyle or tourist attractions within the Greater Southern Waterfront – a 1,000 hectare piece of land (3x that of Marina Bay) to be redeveloped. While this is by no means a new story within the property space, the recent relocation of 500 staff from the Tanjong Pagar Terminal way ahead of schedule before the city port’s lease expiry in 2027 seems to have prompted a return of interest. 
  • With the considerable success of Marina Bay Sands and Gardens by the Bay, we believe the waterfront stretch could potentially be used to develop more than one medium- to large-scale lifestyle/tourist attractions. Nonetheless, given the scant details regarding the development as well as the highly uncertain timeline, we choose not to incorporate any upside into our model parameters until more concrete information is made available. 
  • With or without the catalyst, OUEHT remains our favoured pick within the sector. 
  • Given the currently rich valuations, we maintain NEUTRAL on the sector.



SECTOR COVERAGE PERFORMANCE (3Q17 and 9M17) 


YoY fall in 9M17 and 3Q17 DPU. 

  • For the counters we cover, 9M17 DPU growth ranged from -19.0% to 19.1% YoY while 3Q17 DPU ranged from -28.1% to 10.6%, with OUEHT posting the greatest gain for both periods.

YoY fall in 3Q17 Hotel RevPAR. 

  • For counters under our coverage, YoY growth in hotel revenue per available room (RevPAR) ranged from between -1.4% to 8.0% for 3Q17. OUEHT’s Crowne Plaza Changi Airport – which is currently stabilizing – recorded a 22.4% increase in RevPAR.

YoY fall in 3Q17 Serviced Residences (SR) RevPAU. 

  • For counters under our coverage, YoY growth in serviced residences revenue per available unit (RevPAU) ranged from -9.9% to -3.4% for 3Q17.

Unit prices not compelling. 

  • Hospitality REITs under our coverage are currently trading at FY17 dividend yields of 5.3% to 6.3% and FY18 yields of 5.8% to 6.3%. 
  • We are generally optimistic about RevPAR growth in 2018 and yet, do not find that the REITs under our coverage offer particularly compelling unit prices.

Singapore pure-plays. 

  • While we have HOLDs on all the four REITs, we do note that Singapore pure-plays OUEHT and FEHT stand to benefit the most from an uptick in either operational prospects and/or sentiment locally. Notwithstanding this, OUEHT faces a drop off in CPCA income support next year, while we believe FEHT will continue to face stiff competition in the mid-tier hotel segment at least until 1Q18.

Potential catalyst? 

  • Notably, one potential catalyst for a rerating could be an announcement of any upcoming lifestyle or tourist attractions within the Greater Southern Waterfront (GSW) – a 1,000 hectare piece of land (3x that of Marina Bay) to be redeveloped. 
  • While this is by no means a new story within the property space, the recent relocation of 500 staff from the Tanjong Pagar Terminal way ahead of schedule before the city port’s lease expiry in 2027 seems to have prompted a return of interest and commentary .

Possibility of new attractions. 

  • Given the considerable success of Marina Bay Sands and Gardens by the Bay, we believe the waterfront stretch could potentially be used to develop more than one medium- to large-scale lifestyle/tourist attractions. Note that visitor arrivals jumped 20% YoY in 2010 alone, when our two integrated resorts started operations. 
  • Anything from a large theme park of sorts – especially one water- or nature-related – to a series of culturally iconic landmarks remains a good possibility in our view.

Maintain NEUTRAL. 

  • Nonetheless, given the scant details regarding the development as well as the highly uncertain timeline2 , we choose not to incorporate any upside in our model parameters until more concrete information is made available.
  • With or without the catalyst, OUEHT remains our most favoured pick out of all the HOLDs. Given the currently rich valuations, we maintain NEUTRAL on the sector.


HOSPITALITY REITS UNDER OUR COVERAGE 


Ascott Residence Trust (ART) – Rating: HOLD, FV: S$1.11 

  • With the acquisition of Ascott Orchard Singapore (AOS) now complete, ART is expected to enjoy strong DPU growth in FY18. Gearing is expected to increase to ~36%, what we deem to be a manageable level. Beyond its recent acquisitions in New York and Germany, as well as its divestments in Japan and China, the REIT is expected to continue to benefit from its efforts in strategic asset recycling. 
  • ART’s geographically diversified portfolio helps to minimize the effects of country-specific events and conditions, while its longer-term stays in its serviced residences make it less operationally volatile relative to other hotel-owning REITs.
  • We do not find current unit prices particularly compelling for the REIT with its 6.2% FY18F yield. We currently use a 7.5% cost of equity (assuming a 2.7% risk-free rate) for our valuation of ART.

CDL Hospitality Trusts (CDLHT) – Rating: HOLD, FV: S$1.555 

  • What a rally! CDLHT is one of the best-performing REITs year-to-date, clocking in nearly >  30% of total returns. We do find current valuations fully valued, with the REIT trading at a 6.3% FY18F yield. 
  • Going forward, the full-year contributions from the Lowry Hotel and Pullman Hotel Munich are projected to bolster CDLHT’s DPU growth in FY18. Notwithstanding the full valuations, we do like CDLHT’s exposure to a few faster-growing geographies (such as New Zealand), as well as its exposure to the recovering Singapore market.
  • We use a 7.5% cost of equity (assuming a 2.7% risk-free rate) for our valuation of CDLHT.

Far East Hospitality Trust (FEHT) – Rating: HOLD, FV: S$0.65 

  • FEHT has made an encouraging recovery from its hiccup in 1Q17, in which its SR RevPAU dropped 14.0% YoY, mainly due to a 13.1ppt drop in SR occupancy. Management has mentioned that discussions regarding the 314-room Oasia Hotel Downtown acquisition are proceeding well and we see the announcement of an acquisition before year-end or in early FY18 as a possibility. 
  • We are also excited about FEHT benefitting from the better supply-demand situation in 2018, though we believe the mid-tier hotel space it operates in looks to remains challenging at least till 1Q18. 
  • As mentioned previously, FEHT’s low P/NAV ratio is not particularly compelling to us, given that the independent valuations conducted on its portfolio appear slightly more aggressive than those for CDLHT despite the similar land lease to expiry.
  • We use a 7.7% cost of equity (assuming a 2.7% risk-free rate) for our valuation of FEHT.

OUE Hospitality Trust (OUEHT) – Rating: HOLD, FV: S$0.82 

  • Going forward, we expect OUEHT to benefit from the expected recovery in the hospitality industry, though we do note the fall-off in income support from CPCA from 4Q17 onwards. 
  • Looking ahead to the next two to four years, we continue to anticipate increased traffic at CPCA after the recent opening of Terminal 4. OUEHT clocked 27.0% in total returns from our upgrade to Buy on 1 Nov 2016 till our downgrade on 2 Nov 2017, 9.8 ppt more than that delivered by the FTSE Straits Times Real Estate Investment Trust Index.
  • We use a 7.6% cost of equity (assuming a 2.7% risk-free rate) for our valuation of OUEHT.


HOSPITALITY INDUSTRY PERFORMANCE 

  • In 8M17, AOR, ARR, and RevPAR grew by +1.2 ppt, -0.7% and +0.5% YoY respectively. This compares to the 4.7% decline and 5.3% decline in RevPAR for the whole of 2016 and 2015 respectively. 
  • For FY17, key data points to note are the 3.9% projected increase in hotel room supply, 3.0% increase in visitor days for 8M17 (on the back of a 4.0% increase in tourist arrivals), and 3.0%-3.5% increase in Singapore GDP in 2017.
  • RevPARs are expected to improve in 2018 with better supply-demand dynamics, though some of the REITs may still record slightly negative RevPARs/ RevPAUs in early 2018 given the back-end loaded supply injection in 2017. 

RevPAU performance by hotel tiers 

  • STB categorizes hotels into four tiers based on a combination of factors that include average room rates, location and product characteristics: 
    1. Luxury, 
    2. Upscale, 
    3. Mid-tier, and 
    4. Economy. 
  • Looking at 8M17 RevPAR trends by segment, the Economy segment seems to have posted the most resilient performance in 8M17, posting +4.9% YoY growth.
  • On the other hand, mid-tier hotels posted the poorest performance with a -1.6% drop in RevPAR.


SUPPLY-SIDE ANALYSIS: 3.9% growth in FY17 room supply is back-end loaded 

  • According to Horwath HTL forecasts (as published in the CDLHT 3Q17 presentation), the total room stock is expected to increase 3.9% in 2017, which seems to be on par with the 4.0% growth in visitor arrivals seen in 8M17. 
  • Nonetheless, we note that ~61% for this 3.9% supply injection is expected to come in 4Q17 with notable chain hotels such as Novotel Singapore on Stevens, Mercure Singapore on Stevens, Courtyard Marriott at Novena scheduled to open (or already open as of today). We believe that this back-end loaded injection of room supply may put pressure on RevPARs in 4Q17 to early 2018. 
  • We expect that this injection will be somewhat mitigated by the pick-up in corporate demand coupled with decent growth in arrivals early next year, with the supply-demand situation showing a more significant improvement in the second half.


DEMAND-SIDE: Finally! A pick up in corporate demand 

  • From our channel checks, it appears that corporate demand has started to pick up slightly, with more requests for proposals and corporate enquiries for function rooms and activities recorded. We see this as a positive both for REITs with hotels assets catering to businesses, as well as serviced residences, which have had a difficult year to date. 
  • As of 23 Nov 2017, the Ministry of Trade and Industry (MTI) has upgraded its GDP growth forecast for 2017 from 2-3% to 3-3.5%. As for 2018, MTI projects a growth rate of between 1.5% and 3.5%, with the pace of growth expected to moderate relative to 2017.
  • 8M17 visitor days were up 3.0% YoY on the back of 4.0% increase in tourist arrivals. Looking forward to FY18, we expect leisure demand to continue to show decent growth.


VALUATIONS: NPI yields continue to compress 

  • Going by the broad trend indicated by CDLHT’s assets, it appears that NPI yields have compressed over the past six years while valuations per key have remained relatively stable.


NEUTRAL RATING ON SECTOR 

  • Hospitality REITs under our coverage are currently trading at FY17 dividend yields of 5.3% to 6.3% and FY18 yields of 5.8% to 6.3%. 
  • We are generally optimistic about RevPAR growth in 2018 and yet, do not find that the REITs under our coverage offer particularly compelling unit prices. 
  • OUEHT remains our most favoured pick out of all the HOLDs. Given the currently rich valuations, we maintain NEUTRAL on the sector.







Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-12-01
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.555 Same 1.555
HOLD Maintain HOLD 0.650 Same 0.650
HOLD Maintain HOLD 0.820 Same 0.820
HOLD Maintain HOLD 1.110 Same 1.110



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