Singapore Hospitality - DBS Research 2016-10-18: Soft results expected for most hospitality REITs

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ASCOTT RESIDENCE TRUST A68U.SI  ASCENDAS HOSPITALITY TRUST Q1P.SI  CDL HOSPITALITY TRUSTS J85.SI  FAR EAST HOSPITALITY TRUST Q5T.SI  OUE HOSPITALITY TRUST SK7.SI 

Singapore Property - Soft results expected for most hospitality REITs

• Soft end to the third quarter of 2016 with RevPAR dipping 4.0% y-o-y to S$244 per night in September from the weaker showing at Formula One race event.
• Weak results expected for Hospitality REITs, however we do not expect prices to decline significantly given low market expectations.
• Turnaround expected only in the medium term after the supply of new hotel rooms are absorbed.
• BUY CDL Hospitality Trusts as it is the cheapest hotel REIT in Singapore.

What’s New 

Soft end to third quarter of 2016 

• According to the latest STR Global preliminary estimates, revenue per available room (RevPAR) in September 2016 fell 4% y-o-y to S$244. This was driven by 1.8% decrease in occupancy to 79.1% with average daily room rate (ADR) also falling 2.3% to S$308. 
• The weakness in September was attributed to excess supply, which grew 4% versus only a 2% increase in demand. 
• In terms of demand, STR Global reported that some hotels were likely to be hit by various travel warnings following the spread of the Zika virus in Singapore while the Formula 1 event this year was less popular.
• RevPAR during the F1 weekend was reported to be down 11% compared to the year before. Following the movements in RevPAR in July (+0.5%), August (-6.6%) and September (-4%), RevPAR for the third quarter fell an estimated 4% y-o-y to S$212 and dropped 3% to S$202 for the nine months to September; RevPAR remains on track to achieve our forecast for a 4% y-o-y fall in RevPAR for 2016.

Upcoming results likely to be soft but expectations are already low 

• Heading into the upcoming results season, on the back of a decline in RevPAR in the third quarter, we expect the hospitality SREITs to report another soft set of results.
• Nevertheless, with share prices already trading at depressed levels, and the majority of investors already Underweight on the sector, we expect investor reaction to the results to be muted.

Investment recommendation 

• While the near term performance for hospitality SREITs remains weak, we believe this is an opportunity given depressed valuations as seen by the discount to book value as well as low implied price per key compared to recent market transactions. 
• Our top pick remains CDL Hospitality Trusts (CDREIT, BUY, TP S$1.65), given its status as the cheapest Singapore-focused hospitality SREIT on an implied price per key basis.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-10-18

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