REITs Singapore - UOB Kay Hian 2016-08-01: 2Q16 Results ~ CDREIT (Below), FHT (In Line) And SGREIT (In Line)


2Q16: REITs’ Results – CDREIT (Below), FHT (In Line) And SGREIT (In Line)

  • Tale of two hoteliers, with CDREIT seeing continued weakness on absence of SEA Games, weak corporate demand and renovation disruption. 
  • FHT saw some pick-up in Singapore while its acquisitions bore fruit. 
  • Downgrade CDREIT to HOLD with a reduced target price of S$1.51. 
  • Maintain BUY on FHT with an unchanged target price of S$1.01. 
  • Maintain BUY on SGREIT with an unchanged target price of S$1.00. 
  • SGREIT secured a 5.5% base rental uplift for its Toshin masterlease at Ngee Ann City.


  • Starhill Global REIT (SGREIT), CDL Hospitality Trust (CDREIT) and Frasers Hospitality Trust (FHT) reported their quarterly results.

CDL Hospitality Trust (CDREIT SP/HOLD/ S$1.475/Target: S$1.55)

Results below expectations; Downgrade to HOLD with a reduced target price of S$1.55 (previously S$1.70) based on two-stage DDM (required rate of return: 7.5% and terminal growth rate: 1.7%). 

  • Although gross revenue saw an increase of 8.9% yoy, on fresh contributions from recent UK acquisition Hilton Cambridge and refurbished Claymore Connect, net property income declined 0.9% on higher operating expenses. 
  • 2Q16 DPU of 2.23 S cents decreased 0.9% yoy, with 1H16 DPU accounting for 46% of 2016 estimates, coming in below our and consensus expectations. 
  • We have lowered our FY16 and FY17 DPU estimates by 5-6% on lower Singapore RevPAR expectations, lower Maldives contributions, higher opex and finance costs from the UK acquisition. 
  • CDREIT’s share price has run up by about 14% since our 29 March hospitality note (Upgrade to key pick). We now prefer to buy on dips, with entry price at S$1.35.

Singapore operating performance continues deterioration...  

  • 2Q16 RevPAR declined 9.2% yoy, with the absence of the SEA Games keenly felt. Designated hotels for 2015’s Games accounted for 41.5% of total AUM (Grand Copthorne, Novotel, M hotel Copthorne King’s). Management also flagged sustained weakness in corporate demand especially from the banking & finance and O&G sectors, though promising sectors include IT, pharmaceutical and the public sector. 
  • We reckon corporate demand now accounts for 46- 47% of total demand (historically mid- to high-50s). 
  • Ongoing renovations at M Hotel and Grand Copthorne Waterfront Hotel (expected completion in 2H16) continue to be a drag on operating performance. RevPar was up 0.1% yoy for the first 26 days of this month.

  • ... with likely pangs of indigestion from back-end loaded supply in 2H16, 

  • ... with 1,925 rooms, or 67.2% of 2016 supply (2,866 rooms) slated to hit the Singapore market. The mid- tier and upscale/luxury (segments account for 82.5% of 2H16’s estimated supply of 1,925 rooms, according to consultant Horwath HTL. For the full year, mid-tier (49%) and the upscale/luxury (29%) account for 78% of room inventory.

Cushioned by asset acquisitions and Japan assets. 

  • Recently-acquired UK asset Cambridge City Centre (5.4% of AUM) registered RevPAR growth of 18.9% yoy due to increased corporate demand as renovations were completed last April. Management reported that bookings have thus far been unaffected in the wake of the recent Brexit referendum, and expects growth in leisure travel from a weaker GBP. 
  • The Japan portfolio registered 6.4% yoy growth in RevPar (JPY) as the hospitality market there remained robust. Management is wary of visitor growth moderation, on the recent strengthening of the JPY.

Performance in remaining geographies. 

  • In the Maldives, RevPAR declined 26.6% yoy, as top source market China saw an 11.7% slowdown in visitors for 5M16, amidst an austerity clampdown and weaker Chinese renminbi, while the Russian rouble and euro languished against the US dollar. NPI contribution from Australia came in down under, declining 3.3% yoy, on a weaker AUD (income mostly from fixed rent). New Zealand also saw NPI dip, on a weaker NZ dollar as income primarily stems from fixed rent. A new lease structure for the New Zealand asset was entered into this June, allowing for greater variable income contributions, with management confident of capturing upside from a thriving hospitality scene come lease commencement in Sep 16.

Earnings revision. 

  • We have reduced our 2016 and 2017 DPU estimates by 5-6% as we trim our Singapore RevPar estimates by over 3% factoring in a weaker-than-anticipated domestic hospitality market. 
  • We have also reduced income contributions from the Maldives by about 7%, factoring in further weakness from lower arrivals on the stronger US dollar.

Frasers Hospitality Trust (FHT SP/BUY/S$0.785/Target: S$1.01)

Results in line with expectations; maintain BUY with an unchanged target of S$1.01 based on two-stage DDM (required rate of return: 8.0% and terminal growth rate: 1.7%). 

  • Gross revenue and net property income saw growths of 33.9% and 40.5% yoy respectively, attributable to the acquisition of Sofitel Sydney Wentworth and maiden contributions from Maritim Hotel Dresden. 
  • 3QFY16 DPU of 1.51 S cents fell 3.0% yoy, mainly on unit base expansion (+14.9% yoy) post FHT’s private placement in Jun 15. The results came in line with expectations, with 9MFY16 DPU representing 75.0% of our full-year forecast.

Rosy Australia performance and enhanced recovery in Singapore. 

  • The Australian portfolio (entirely in Sydney) turned in robust performance, with RevPAR up 11.4%, propped up by recent acquisition Sofitel Sydney Wentworth (SSW). Excluding SSW, 3QFY16 RevPAR grew 4.5% yoy, with Australia operating profit up 10.5% yoy. 
  • Australia clocked in 11% yoy growth in visitor arrivals in 5M16, with Sydney continuing to be a beneficiary of both healthy leisure and corporate demand. Consultant JLL notes that Sydney hotels have maintained high occupancy, likely to be sustained by resilient corporate demand and healthy line-up of events (Good Food Month). 
  • Completion of refurbishments at the Intercontinental Singapore in end-Feb 16 saw 3QFY16 Singapore RevPAR improve on higher occupancy, as room inventory was fully restored. However, we note that Fraser Suites registered lower RevPar on weaker demand from O&G corporates, though efforts are being made to tap into more promising sectors (IT and pharmaceuticals). 
  • Intercontinental Singapore could underpin further growth, with management noting that the asset has not reached optimal performance.

Cushioning the impact from more tepid geographies. 

  • UK RevPAR dipped during the quarter, with operating income down 4.2% in 3QFY16. Management attributed this to higher labour costs (minimum wage hike in Apr 16), the recent spate of attacks in Europe, as well as Brexit concerns. Despite registering RevPAR growth of 4.4% yoy, its Japan asset saw revenue dip due to lower wedding income contribution. 
  • Management also expects tourist arrival growth to moderate due to strengthening JPY stronger (28% yoy increase in arrivals for 6M16). 
  • In Malaysia, The Westin KL continued to underperform due to the lacklustre O&G sector and major European airlines reducing flights to KL.

Asset enhancement. 

  • As anticipated, Australia asset Novotel Rockford is scheduled for refurbishment in 1Q17, following AEI completion at Intercontinental. Renovations are expected to encompass the entire property (230 rooms, two F&B outlets, lobby and public areas) Expected to last for nine months, the enhancement exercise is slated for completion in 4Q17. This would allow the asset to see potential uplift in conjunction with the completed redevelopment works at the neighbouring Sydney Convention Center.

Starhill Global REIT (SGREIT SP/BUY/S$0.80/Target: S$1.00)

Results in line; maintain BUY and target price of S$1.00, based on DDM (required rate of return: 6.7%, terminal growth: 1.5%). 

  • SGREIT reported 4QFY16 DPU of 1.29 S cents, flat yoy. The quarter saw gross revenue and NPI increase by 3.6% and 0.2% respectively, as full contributions from recent acquisitions were slightly mitigated by lower contribution from Wisma Atria, as well as its China and Japan assets. The results were in line with expectations, coming in at 99% of our full-year estimates.

Retail update. 

  • Wisma Atria retail revenue declined 4.1% yoy and its NPI declined 3.8% yoy mainly due to lower occupancies amidst ongoing reconfiguration. However, committed occupancy inched to 97.7% (from 96.8%) in 4QFY15/16 with new tenants and concepts introduced that include Japan Food Town, Franck Muller, Pasquale Bruniand and Mango. 
  • Tenant sales decreased 2.5% yoy during the quarter, while shopper traffic increased 2.3% yoy. Ngee Ann City (retail) maintained full occupancy. Revenue was up 1.9% yoy and NPI was up 0.5% yoy.

Singapore office portfolio’s NPI decreased 3.6% yoy...

  • ... in 4QFY15/16 due to lower demand as occupancy dipped to 95.6% (from near full occupancy). However, Starhill recorded a 3.5% positive rental reversion for leases committed during the quarter. 
  • Proactive leasing efforts saw forward renewal of about 15% of the office leases by gross rent due for expiry in FY 2016/17.

Triennial upward-only rental review has been made under the master lease agreement...

  • ... that Toshin has with Starhill at Ngee Ann City, which expires in Jun 25. Up for renewal every three years, this year’s upward-only rent review was recently concluded in June, representing the second exercise since Toshin renewed its master lease agreement for a period of 12 years (commencing 8 Jun 13). 
  • Toshin, which is also Starhill's largest tenant, accounted for approximately 19.7% of SGREIT’s portfolio gross rent in Mar 16.

Orchard road rents continue to slacken for the sixth consecutive quarter, ...

  • ... reaching S$32.50 psf pm in 2Q16 (-4.4% yoy, -1.1% qoq), according to industry consultant CBRE. Comparatively, suburban rents which only started to register a decline from 4Q15, have been relatively more resilient, shrinking by a smaller 0.7% qoq (-2.8% yoy) to S$29.45 psf/month.

Potential beneficiary of pick-up in tourist arrivals, as Orchard assets Wisma Atria and Ngee Ann City make up 66.5% of overall portfolio value. 

  • We reckon demand could see a pick-up in tandem with resurgent visitors from Indonesia and China. Visitor arrivals in 5M16 saw continued double-digit yoy growth rising 13.3%, underpinned by blistering growth from China, and Indonesia. 
  • Management noticed an uptick in demand from the Indonesians, likely due to favourable currency movements, with STB revealing that shopping accounted for 28% of Indonesian tourism receipts in 2015. 
  • Our channel checks indicate prevalent cautious spending habits among affluent Chinese.

Better positioned for a challenging retail environment. 

  • Starhill Global is likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and asset classes. 4QFY16 saw overseas assets comprise 31.7% of asset value. 
  • Bearing in mind the lack of office supply in Orchard, the office component (100% occupied) contributes to 13.7% of gross revenue. 
  • Increased retail space, rising labour costs and threats from alternative retail channels have in part prompted retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) to guide for a moderation in rental reversions.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.00 Same 1.00
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