Singapore Hospitality REITs - OCBC Investment 2018-09-06: Do Not Disturb

FAR EAST HOSPITALITY TRUST SGX:Q5T OUE HOSPITALITY TRUST SGX:SK7 ASCOTT RESIDENCE TRUST SGX:A68U CDL HOSPITALITY TRUSTS SGX:J85

SG Hospitality REITs - Do Not Disturb

2Q18 DPU y-o-y growth came in at +0.0% for Ascott Residence Trust (SGX:A68U), +2.9% for CDL Hospitality Trusts (SGX:J85), +4.1% for Far East Hospitality Trust (SGX:Q5T), and -3.3% for OUE Hospitality Trust (SGX:SK7).
- Ascott Residence Trust recorded a 7% increase in gross profit but DPU growth was affected by the enlarged unit base post the rights issue.
- CDL Hospitality Trusts’s results were dragged down by NZ and the Maldives, while
- OUE Hospitality Trust was affected by the lack of income support from Crowne Plaza Changi Airport during the quarter as well as weak retail results.
- On the other hand, Far East Hospitality Trust outperformed operationally, clocking RevPAR growth for its hotel portfolio that was better than its peers.

~ SGinvestors.io ~ Where SG investors share

Recall that after a relatively flat RevPAR performance in 1Q18, we expected RevPAR growth to accelerate for SG hotels as we progressed into the year, allowing for more time since the new supply injection in 4Q17. 2Q growth figures turned out to be generally disappointing.
CDL Hospitality Trusts’s RevPAR growth came in at -0.9%, affected by the Trump-Kim Summit and late booking patterns, while
OUE Hospitality Trust’s Mandarin Orchard Singapore recorded -0.5% growth for similar reasons.
On the other hand, Far East Hospitality Trust posted a stellar RevPAR growth of +6.9%. If we strip out Oasia Hotel Downtown’s performance, we believe for the wider portfolio’s growth likely came in at +3% to +4% which is still a performance beat.

This results season was a busy one for us. We downgraded CDLHT post-results from Hold to Sell on 30 Jul (see report: CDL Hospitality Trusts - Unfortunate Case Of Delayed Gratification?), before upgrading it back to Hold after it dropped 9.1% (see report: CDL Hospitality Trusts - Take A Breather... ).
Similarly, we downgraded Far East Hospitality Trust pre-results from Buy to Hold on 30 Jul (see report: Far East Hospitality Trust - Expecting Softer 2Q18, But Still Our Favourite By Far ), before upgrading it to Buy after it dropped 8.8% (see report: Far East Hospitality Trust - Too Far South From Our Fair Value).
As of 4 Sept’s close, both CDL Hospitality Trusts and Far East Hospitality Trust are up ~4% since our upgrades. We continue to monitor the market for tactical opportunities and will make updates accordingly.

According to the latest STB numbers, Jul visitor arrivals were up 6.0% y-o-y while Jul visitor days were up 3.2%. Jan-Jul RevPAR increased 3.2% y-o-y. Out of the four hotel tiers, y-o-y growth for Jul RevPAR was highest for luxury (+3.9%), followed by Mid-Tier (+1.6%), then Upscale (0.0%), and Economy (-0.4%).
Going forward, we continue to expect
1. robust leisure demand,
2. soft corporate demand and
3. continued outperformance of Mid-Tier hotels locally.
We push back our expectations of a strong RevPAR pick-up from 2H18 to 2019, and believe defensive names from other sub-sectors may outperform hospitality. For switch ideas, refer to our 31 July S-REITs report: Increase Defensiveness Among Defensives as well as yesterday’s S-REITs sector update: A Defensive Armour Despite Some Chinks.
Within hospitality, Far East Hospitality Trust remains our top pick given its
1. 100% SG-based portfolio,
2. the mid-tier positioning of its hotels and
3. the higher chance of operational outperformance given its relative underperformance prior to 2018.
Maintain NEUTRAL on hospitality.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2018-09-06

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