Hospitality REITs - OCBC Investment 2019-03-12: More Sanguine Outlook Ahead

ASCOTT RESIDENCE TRUST (SGX:A68U)

Hospitality REITs - More Sanguine Outlook Ahead

As the destination for various international headline events like the premiere of the Crazy Rich Asians movie and the Trump-Kim Summit, Singapore’s tourism sector had a stellar year in 2018.
International visitor arrivals rose 6.2% to an all-time high of 18.5m while visitor days grew 4.8% y-o-y, concluding the year with consecutive y-o-y growth in the past 12 months for both indicators. This was mirrored by industry-wide RevPAR which grew 2.4% y-o-y to S$188.6, led by both higher occupancy (+1.4 ppt to 86.0%) and average room rate (+1.7% to S$219.1). This is the first time annual RevPAR has recorded positive growth after declining successively for 3 years since 2015.
Similarly, tourism receipts (TR) grew 1.0% y-o-y to hit a record high of S$27.1b. This growth is attributable largely to increased tourist volumes as spending decreased for Shopping (-14%), Food & Beverage (-4%) and Accommodation (-5%). Tourists spent more on Sightseeing, Entertainment & Gaming (+6%) and Other TR Components (+21%).
14 out of the country’s top 15 visitor arrivals markets recorded growth, with India (+13%), China (+6%) and Indonesia (+2%) the top three countries.

However, hospitality REITs had a mixed operational performance, with some only posting an uptick in 4Q18.
For Hospitality REITs with a strong Singapore presence, CDL HOSPITALITY TRUSTS (CDLHT, SGX:J85) recorded a 2.6% y-o-y growth in RevPAR for its Singapore portfolio in 4Q18, following two consecutive quarters of weakness (3Q18: -0.3% y-o-y; 2Q18: -0.9% y-o-y). For the full-year, RevPAR was up 0.6% to S$160. Furthermore, CDLHT highlighted during its 4Q18 results announcement that the RevPAR for its Singapore Hotels rose 5.1% y-o-y for the first 27 days of Jan 2019.
OUE HOSPITALITY TRUST (SGX:SK7)’s Mandarin Orchard Singapore’s RevPAR improved 1.6% y-o-y to S$229 in 4Q18, and this also followed two preceding quarters of y-o-y declines.
Meanwhile, FAR EAST HOSPITALITY TRUST (SGX:Q5T) enjoyed a 7.5% y-o-y increase in both RevPAR and RevPAU for its Hotel and Serviced Residences portfolios, respectively.
RevPAU for ASCOTT RESIDENCE TRUST (SGX:A68U)’s overall portfolio grew 5% y-o-y in 4Q18.
However, FRASERS HOSPITALITY TRUST (SGX:ACV) saw a 2.1% y-o-y dip in its Singapore portfolio RevPAR, and there were also declines seen from its Malaysia and Japan portfolios. Its Australia and UK portfolios fared better, improving 2.6% and 8.2% y-o-y, respectively.

2017 saw a significant expansion of hotel room supply due to the opening of 7 new hotels such as Andaz Singapore in Bugis and Courtyard by Marriott at Novena. However as mentioned above, average room rates have increased slightly in 2018, which is encouraging news for the industry. This indicates that the market has been slowly absorbing the new supply within the past year.
New pipeline supply is forecasted to increase by 3,073 rooms in total for the next 3 years, representing an increase of 4.5% from end-2018 levels.

Over the past six months, there has been increasing activity on the local hospitality transactions front. While office deals were grabbing much of the headlines in 2017 and 2018, we believe the tide has turned and more capital flows are now seeking good quality hospitality assets.
Some of the notable transactions include Ascott Residence Trust’s proposed divestment of its Ascott Raffles Place Singapore property at an exit yield of ~2%, or 64% above its book value.
Oxley Holdings (SGX:5UX) accepted a Letter of Intent in Jan this year for the sale of its Mercure and Novotel Hotels at Stevens Road for S$950m, or ~S$1.2m per key.
Meanwhile, a hotel site along Club Street under the Government Land Sales (GLS) programme was awarded to Midtown Development Pte Ltd, whose winning tender of S$562.2m, or S$2,148.50 psf ppr, set a new record for a 99-year land at a GLS tender.

ASCOTT RESIDENCE TRUST (SGX:A68U) [Rating: BUY; Fair Value: S$1.25] is our top pick within the hospitality sector.
Ascott Residence Trust recently delivered strong 4Q18 results, with portfolio RevPAU growing 5% y-o-y and 8 out of 12 management contract geographies clocking positive RevPAU growth in SGD terms. The REIT boasts a highly geographically diversified portfolio of high quality assets and given the ongoing macroeconomic uncertainties we look upon this defensive positioning favourably.
Post the divestment of Ascott Raffles Place at an attractive exit yield of ~2%, Ascott Residence Trust’s gearing is expected to drop to ~32%. This would translate into a debt headroom of close to S$1b, and offers Ascott Residence Trust greater flexibility to pursue DPU accretive acquisitions.

Wong Teck Ching Andy CFA OCBC Investment Research | Deborah Ong OCBC Investment | Joseph Ng OCBC Investment | https://www.iocbc.com/ 2019-03-12

SGX Stock Analyst Report BUY MAINTAIN BUY 1.250 SAME 1.250