SG Hospitality Sector - OCBC Investment 2019-02-07: Jostling Into The New Year!

ASCOTT RESIDENCE TRUST (SGX:A68U) OUE HOSPITALITY TRUST (SGX:SK7) FAR EAST HOSPITALITY TRUST (SGX:Q5T)

SG Hospitality Sector - Jostling Into The New Year!

Since CDL HOSPITALITY TRUSTS (SGX:J85), ASCOTT RESIDENCE TRUST (SGX:A68U), and OUE HOSPITALITY TRUST (SGX:SK7) posted their FY18 results on 29 Jan till 4 Feb’s close, the REITs have posted total returns of +5.7%, +2.6%, and +6.5% respectively. FAR EAST HOSPITALITY TRUST (SGX:Q5T) which has yet to report its earnings, has also posted total returns of +4.0% over the same period. This compares to total returns of -0.3% from the Straits Times Index, and +0.0% from the FTSE Straits Times REIT Index.
We highlight three catalysts for the strength of the rally:
1. favorable operational outlooks by the three REITs on RevPAR growth (especially local),
2. expectations of a pause in the Fed rate hike,
3. recent hospitality transactions conducted at rich valuations vs. valuations of comparable assets on balance sheets.
On point1, we highlight that CDL Hospitality Trusts disclosed that its Singapore hotels clocked a RevPAR of +4.3% for the first 27 days of Jan 2019. Without Orchard Hotel (which is undergoing refurbishment), we believe this RevPAR figure would be closer to 6%.

Out of the stocks under our coverage, we have a clear preference for OUE Hospitality Trust, which remains our top-pick within this sub-sector.
OUE Hospitality Trust is one of only two SG-only hospitality REITs, and we expect the REIT’s assets to benefit from the benign hotel room supply situation locally. In addition, we expect RevPARs at Crowne Plaza Changi Airport to be boosted when Jewel Changi Airport opens in 1H19 while OUE Hospitality Trust’s key asset Mandarin Orchard Singapore looks to benefit from the proposed plans to rejuvenate Orchard Road, which were announced recently. In particular, for the latter, as part of a year-long trial by the Orchard Road Business Association (expected to start in Apr), Orchard Road will see more activities such as retail and food and beverage pop-ups, and arts and entertainment events.
OUE Hospitality Trust currently trades at a 7.1% FY19F dividend yield, which is 70 bps and 150 bps over Far East Hospitality Trust’s and CDL Hospitality Trusts’ respectively.

We also have BUYs on Far East Hospitality Trust and Ascott Residence Trust – we like Far East Hospitality Trust for its SG-hospitality focus and undemanding valuations, and Ascott Residence Trust for successful capital recycling and its defensive portfolio of high-quality assets.
On CDL Hospitality Trusts, we remain cautious given that 1Q19 will likely still be dragged down by the closure of its Maldives resort, Dhevanafushi Maldives Luxury Resort (DMLR). We believe it is possible that the Maldives resort may continue to be a drag even after its opening in early 2Q19, given that the asset will need time to ramp up occupancy. That said, we do recognize CDL Hospitality Trusts as another beneficiary of the SG hospitality upturn and continue to monitor the stock for a more compelling entry.
To recap, looking at hospitality REITs under our coverage, we have BUYs on
- OUE Hospitality Trust [BUY; FV: S$0.82],
- Far East Hospitality Trust [BUY; FV: S$0.675], and
- Ascott Residence Trust [BUY; FV: S$1.25].
Maintain OVERWEIGHT on Singapore Hospitality.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-02-07

SGX Stock Analyst Report BUY MAINTAIN BUY 1.250 SAME 1.250

BUY MAINTAIN BUY 0.82 SAME 0.82

BUY MAINTAIN BUY 0.675 SAME 0.675