REIT - CIMB Research 2018-01-02: RevPAR Could Climb To Peak Levels Come 2019F


REIT - RevPAR Could Climb To Peak Levels Come 2019F

  • While market consensus projects a meaningful recovery in 2H18F, we are calling for an earlier- and stronger-than-anticipated recovery in industry RevPAR.
  • Unlike the other rising sub-segments, such as residential and office, which could face higher supply come 2021F, hotels have minimal new supply further out.
  • Assuming that demand continues to dial up, the cyclical recovery could potentially lead to a multi-year upswing – one which we urge investors to position for.
  • Reiterate Overweight on the hospitality sub-sector. Upgrade CDREIT and FEHT from Hold to Add, and retain Add on OUEHT and Hold on ART.

Calling for a sharper recovery in 2018F 

  • As c.60% of the new rooms in 2017F would have only come on stream in 4Q, market consensus views that a meaningful recovery period would take place in 2H18F, after a digestion period in 4Q17-1H18F. However, our on-the-ground checks revealed that competition is behaving rationally and not “killing” the industry’s profitability.
  • In addition, our bottom-up RevPAR analyzer suggest that hospitality REITs, especially CDREIT and OUEHT, are at an inflection point. We believe that CDREIT could report its first improvement in quarterly RevPAR in over five years in 4Q17F, while OUEHT’s Mandarin Orchard Singapore (MOS) could register its third consecutive quarterly yoy improvement in RevPAR.
  • We now call for an earlier- and stronger-than-anticipated recovery in industry RevPAR. We forecast Singapore hotels’ RevPAR to improve by 7% yoy in 2018F, a much sharper recovery vs. our previous expectation of 3%. With supply tapering off and demand expected to continue dialing up, we project RevPAR climbing another 5% yoy to S$224 in 2019F. This also means that RevPAR in 2019F could reach the previous peak level recorded in 2012.
  • Breaking down our RevPAR forecasts, we project that overall hotel occupancy could reach near 90% in 2019F as supply tapers off. This also means that bargaining power will swing back to hoteliers, and they will be able to raise room rates. We note that average room rates (ARR) contracted 11% from the peak in 2012 and was the prime reason for the decline in RevPAR for the corresponding period.
  • We project ARR to jump 3% yoy in 2018F vs. -1% yoy in 2017F and rise another 4% yoy in 2019F to S$250.2, which is also equivalent to the mid-cycle pricing rate. This also suggests scope for upside.
  • Should hoteliers begin aggressively pricing up room rates, we believe CDREIT and FEHT have the most to gain
    • Today, CDREIT’s FY17F ARR of S$180 is 22% below its FY12 high of S$231, and comparable to its ARR in FY09, the Global Financial Crisis year. 
    • Similarly, FEHT’s FY17F ARR of S$153 is 22% below its FY12 high of S$198. 
  • In our base case, we project that CDREIT and FEHT’s FY19F RevPAR would recover to their FY14-15 levels, which would be in line with their respective 6-year average levels (2012-17F). 
  • In a blue sky scenario, assuming that CDREIT and FEHT would be able to replicate their high FY12 RevPARs in FY19F – our base case only assumes that would occur three years out, in FY21F – we project that there could be a further 6% upside for CDREIT and 8% for FEHT.

Supply is tapering 

  • Hospitality consultant Horwath HTL estimates that new room supply could post a CAGR of 2.1% during 2016-2020F vs. CAGR of 5.1% in 2010-16. Together with the lack of new land for hotels (since 2014, no new sites for development have been introduced in the Government Land Sales programme), we believe the limited supply going forward will underpin a recovery in industry RevPAR. 
  • We note that the firm estimates that around 50% of the new supply in 2017F stemmed from mid-tier hotels while 83% of new rooms in 2018F will come from upscale/luxury hotels. The ‘REIT-ed’ hotels straddle between the mid and upscale tiers.
  • To gather a sense of competition, we checked out some of the new hotels in the Orchard Road micro-market. Around 50% of the new room supply in 2017 is slated to open in or around Singapore’s premier shopping belt. We note that OUEHT has the highest exposure to the Orchard Road belt, with MOS making up 55% of its assets under management (AUM). However, we believe the hotel is relatively insulated from direct competition as it straddles between the upscale and luxury segments. Meanwhile, most of the new supply in Orchard Road straddle between the mid-tier and upscale segments. 
  • On the other hand, most of CDREIT and FEHT’s hotels straddle between the mid-tier and upscale segments. 
    • FEHT has three properties in Orchard Road which makes up 28% of its AUM. 
    • CDREIT has one property in Orchard Road which makes up 16% of its AUM.
  • Nonetheless, our worries of fierce competition are allayed. We found the new hotels to be holding rates up well and looking to increase rates come 2018F, reflecting healthy demand, occupancy rates at the new hotels are strong.
  • Moreover, we found new entrant micro-chain YOTEL to be an interesting proposition. We believe YOTEL could appeal mostly to the digital customer, and may not be a direct threat to traditional hotels. As for Airbnb, we view it as complementary to the hospitality industry, rather than a substitute product. 
  • We believe hotels would be able to stand their ground in holding on to their traditional customers. There’s a market for everyone.

Demand continues to dial up 

  • We expect the momentum of visitor arrivals to hold up. Visitor arrivals for 9M17 grew 5.1% yoy. Sep, in particular, was a strong month as arrivals surged 15.4% yoy. We project 4% yoy growth for 2017F, 6% for 2018F and 3% for 2019F. This means that we are projecting visitor growth of 4.3% CAGR for 2016-2019F vs.
  • 3.1% CAGR in 2013-16 (the downcycle period). This also implies that incremental demand will outstrip additional supply. Our sensitivity analysis found that every 1% pt increase/decrease in visitor arrival growth in 2018F will lead to a 0.9% increase/decrease in industry RevPAR.
  • We believe that growth in 2018F will be underpinned by the return of large biennial events (occurring in even-number years), the ramp-up of Changi Airport Terminal 4 (which will increase passenger traffic), as well as top-down efforts to boost tourism, such as increasing air linkages and rejuvenating tourist attractions.
  • In recent years, Singapore Tourism Board (STB) has pursued increased air connectivity with high-growth secondary cities in China and India. As a testament to the agency’s success, China has in 2016 overtaken Indonesia as the city-state’s top source market. Further, with stabilised currencies, we believe that there could be a higher uptick in Malaysian and Indonesian visitors in 2018F.
  • In addition, other data points such as tourism spending and average length of stay have stabilised, confirming that demand has firmed. 
  • Lastly, to support the tourism industry, the Singapore government has set aside S$700m in a Tourism Development Fund to be invested from 2016 to 2020F.

Position for blue skies scenario; upgrading CDREIT and FEHT to ADD 

  • Unlike the other rising sub-segments, such as residential and office, which could face higher supply come 2021F, the hotel sub-segment has minimal new supply further out. Assuming that demand continues to dial up, the cyclical recovery could potentially lead a multi-year upswing – one which we urge investors to position for.
  • Against the backdrop of our call for a sharper recovery, we input higher growth for the hospitality REITs. We accelerate the REITs’ yoy RevPAR improvement for FY18F-19F to 5-7%, from 3-5% previously. 
  • In addition, we note that some of the REITs, specifically ART and CDREIT, had taken the opportunity to recapitalise their balance sheets via rights issues in 2017. We factor in acquisitive growth for the trio of ART, CDREIT and FEHT.
  • Consequently, we have, across the board, increased our DPU expectations and DDM-based TPs. We upgrade CDREIT and FEHT from Hold to ADD, and retain ADD on OUEHT and HOLD on ART. FEHT is our preferred pick in the sub-sector, as we expect the stock to deliver c.23% total returns in 2018F, the highest among peers.
  • In terms of exposure to Singapore hotels, our sensitivity analysis finds that every 1% pt increase in FY18F Singapore RevPAR could lead to 0-0.9% increase in the TP of hospitality REITs. We found that OUEHT is the most sensitive to changes to Singapore hotel RevPAR, with every 1% pt increase leading to a 0.9% increase to its TP.
  • Admittedly, hospitality REITs have done well in 2017. Nonetheless, we believe that the market has not fully priced in a multi-year cyclical upturn for the subsector.
  • We note that hospitality REITs are coming off a low-base, after enduring five years of downturn (2013-17). In addition, we believe that REITs with DPU growth have the potential to experience compression in yield spreads, and are able to mitigate rate fears.
  • As a cross-check, our DDM-based valuations imply price per key for the REITs’ Singapore hotel portfolio to range from c.S$700k-1.2m, which we deem as reasonable when compared against physical market transactions and replacement costs. CDREIT’s Singapore hotel portfolio appears to be relatively undervalued, and is currently valued at S$586k/key, suggesting that a premium to its book is warranted. We have also referenced our DDM-based TPs against the respective REITs’ trading yield bands. Although our TPs imply forward yields which are above historical means, or in some instances, more than 1 s.d. above mean, we believe that up-cycle RevPAR should warrant up-cycle dividend yields, especially in a potential multi-year upswing.

Company Updates 

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-01-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.770 Same 1.770
ADD Maintain ADD 0.890 Same 0.890
ADD Maintain ADD 0.840 Same 0.840
HOLD Maintain HOLD 1.200 Same 1.200