Hospitality Sector - OCBC Investment 2016-11-21: Top Picks ~ Current Price Level Attractive

Hospitality Sector - OCBC Investment 2016-11-21: Top Picks - Current Price Level Attractive Hospitality REITs CDL HOSPITALITY TRUSTS J85.SI  ASCOTT RESIDENCE TRUST A68U.SI  OUE HOSPITALITY TRUST SK7.SI 

Hospitality Sector - Top Picks - Current Price Level Attractive

  • Recap of 3Q16 performance.
  • Hotel DD-SS expected to balance in FY18.
  • BUY ratings on ART, CDLHT, OUEHT.

REIT yields between 7.1% and 7.7% 

  • For the hospitality counters we cover, 3Q16 DPU growth ranged from -2.5% to -7.4% YoY, after adjusting for one-off items and equity financing.
  • Growth in Hotel revenue per available room (RevPAR) ranged between -5.8% to -7.8% in 3Q16, with all the REITs citing poor corporate demand as the reason for declines. Growth in Serviced Residences (SR) revenue per available unit (RevPAU) ranged from -2.7% to -12.6% for 3Q16. Hospitality REITs under our coverage are currently trading at blended FY16/17 yields of 7.1% to 7.7%.

Recap of FY16 YTD 

  • For FY16, we note that while the growth in tourist arrivals has been robust (up 10.3% YoY from Jan-Aug) and will probably outstrip the forecasted 4.1% growth in hotel room supply for the entire year, corporate demand has been tepid and the Singapore GDP growth rate forecasted to come in between 1% and 2%.
  • Given that corporate demand commands higher average room rates (ARR) compared to the wholesale group, it is unsurprising that RevPAR has dropped 2.7% YoY for the Jan-Aug period.
  • For the current quarter, our channel checks have revealed that Oct was a particularly poor month for hotels, and we will keep tabs on indicators for Nov and Dec.

NEUTRAL rating on the sector 

  • Looking forward to FY17, with a forecasted 6.1% growth in hotel rooms and tepid economic growth outlook, RevPARs are expected to continue their decline, in our view, and especially so for hotels that rely on corporate demand.
  • RevPARs are only expected to improve in FY18 with better supply-demand dynamics. Looking at RevPAR trends by segment, the Luxury and Midtier tiers looks most resilient for the Jan-Aug period, posting 0.0% and -0.8% YoY growth respectively. 
  • While we expect single-digit RevPAR declines next year, current price levels look very attractive for some of the REITs under our coverage – we are positive on Ascott Residence Trust (ART) [BUY; FV: S$1.24], and CDL Hospitality Trust (CDLHT) [BUY; FV: S$1.48] and OUE Hospitality Trust (OUEHT) [BUY; FV: S$0.73]
  • Maintain NEUTRAL on the sector.

Deborah Ong OCBC Investment | 2016-11-21
OCBC Securities Analyst Report BUY Maintain BUY 1.24 Same 1.24
BUY Maintain BUY 1.48 Same 1.48
BUY Maintain BUY 0.73 Same 0.73