Hospitality REITs Sector Outlook - Maybank Kim Eng 2019-04-17: Preferred S-REIT Sector

ASCOTT RESIDENCE TRUST (SGX:A68U) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T) FRASERS HOSPITALITY TRUST (SGX:ACV)

Hospitality REITs Sector Outlook - Preferred S-REIT Sector

Strong supply and poor tourist arrivals in 2014-2015 trimmed RevPARs to 2011 levels, but we see Singapore hotels ending their longest-ever RevPAR downcycle, as evident from improving RevPARs among the listed REITs.
Tourism growth, buttressed by Chinese inbound visitors and tight demand for rooms, have pushed occupancies up from 84% to a 5-year high of 89% in Jan 2019. Hoteliers have also started to see improved bookings from higher-yielding corporate customers.

We forecast 5-8% RevPAR growth for 2019-20E, preferring hotels to serviced residences as they should command stronger pricing power against contracting supply. The sector’s recovery should be bolstered by easing supply, with new hotel rooms expected to slow to a 1.2% CAGR in 2018-21E from 4.2% in 2014-18.

Overseas growth opportunities appeal to hospitality REITs, which they mostly de-risk through master leases and higher fixed-rental structures. We see DPU upside from potential acquisitions. We believe deal momentum, especially in Europe, could pick up, especially given positive carry for EUR-denominated debt funding.
CDL HOSPITALITY TRUSTS (SGX:J85) and FRASERS HOSPITALITY TRUST (SGX:ACV) should be best positioned for acquisition growth, given their higher debt headroom and visible sponsor pipelines, with returns on CDL Hospitality Trusts’ recent deals set to improve alongside stronger demand-led fundamentals.

The key risks to our forecasts are:
1. sizeable short-term increases in hotel room supply without commensurate growth in demand;
2. deterioration in global macro outlook resulting in decline in RevPARs;
3. significant volatility in foreign exchange rates impeding hedging efforts and impacting DPU estimates; and
4. sharper-than-expected rise in interest rates which could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Hospitality is our preferred S-REIT sub-sector, with its 6.0-6.8% 2019 DPU yields already the highest amongst S-REITs.
Still, our 4-8% DPU CAGR over 2019-2021E may not fully capture the upside to cash flows. We see improving occupancies and RevPARs as near-term catalysts for the sector.

CDL Hospitality Trusts’ is our top hospitality sector pick, as its scale and liquidity render it a good proxy for a sustained recovery in Singapore’s hospitality sector. Meanwhile, its overseas expansion has gained traction, with its continued push into Europe supported by positive carry from low funding costs, supported by low gearing and an estimated SGD600m debt headroom.

FAR EAST HOSPITALITY TRUST (SGX:Q5T) provides the only pure exposure to our expected rebound in the hospitality segment. Rising contributions from its recently-acquired Oasia Downtown, an expected 5% y-o-y annual recovery in hotel RevPARs and three Sentosa properties opening this year are expected to anchor its strongest 8% DPU CAGR in FY18-20E.
We see stronger DPU upside potential from its higher Singapore RevPAR y and visible sponsor’s ROFR pipeline.