Hospitality REITs - CGS-CIMB Research 2019-07-24: 2019F To Be A Slow Year


Hospitality REITs - 2019F To Be A Slow Year

Slow tourist arrivals in the first five months of 2019

  • Singapore Tourism Board (STB) recently released May statistics on the hospitality industry recently. It reported that in the first five months of the year, total tourist arrivals rose 1.5% y-o-y, mainly driven by tourists from Greater China (+3.2% y-o-y), North Asia (+3.7% y-o-y), Europe (+5% y-o-y), Americas (+8% y-o-y) and Oceania (+3% y-o-y) regions which offset the decline in arrivals from Southeast Asia (-1% y-o-y) and South Asia (-3.4% y-o-y).
  • Arrivals from Southeast Asia has been slow since the start of the year, affected mainly by lower arrivals from Indonesia (-2.4% y-o-y in 5M19), and Thailand (- 6.6% y-o-y in 5M19) and Vietnam (-4.1% y-o-y in 5M19) to a smaller extent. The decline in Indonesia and Vietnam tourist arrivals coincided with the weakness in their currencies against the S$. Similarly, arrivals from South Asia were slow throughout 5M19 with weaknesses seen in most countries in the region.
  • On the brighter note, the average length of stay in 5M19 was slightly longer at 3.35 days vs. 3.32 days in the previous corresponding period. The proportion of stay spent in hotels remained relatively constant at 29% in 5M19.

5M19 RevPAR flat y-o-y

  • On the hotel front, 5M19 RevPAR was flat y-o-y at S$185. While there was a 0.6% y-o-y increase in average room rates, occupancy rate declined 0.5% pts y-o-y to 84.7%.
  • Only luxury hotels managed to chalk an improvement in RevPAR in the first five months of the year. This could be due to the smaller hotel supply in the luxury segment and the more resilient spending power of this group of tourists.
  • Upscale and mid-tier hotels reported an average RevPAR declines of 2.9% and 0.2% y-o-y, respectively, after turning around in 2018. This could be due to the more intense competition within this space. Most of the supply in the past and upcoming supply are within this segment.
  • Although the economy tier had enjoyed strong RevPAR growth in the past two years (2017-2018), it was not spared this time round with a 0.8% y-o-y decline in RevPAR due to lower occupancy rates as tourist arrivals dwindled, offsetting the impact of higher room rates. Economy hotels have been increasing room rates in the past two years. The narrower pricing gap between the economy hotels and higher-tier hotels may have contributed to the decline in RevPAR.

Tourist arrivals and RevPAR came in below expectations

  • Tourists arrivals and RevPAR in the first five months of the year were below our expectation of 3% and 2.5%, respectively, for the full-year. Although supply continues to be low, demand has also declined due to
    1. fewer large-scale events this year,
    2. weaker corporate travel amid weaker economic outlook and trade tensions, and
    3. the stronger S$. Due to the slower demand, competition within the industry did not ease as much as expected, dragging down RevPAR.

2H tourist arrivals may continue be slow; 2020 could be a better year

  • Looking forward to 2H of the year, tourist arrivals may continue to be slow. Although there are a few larger events in 2H19 (Communic Asia in Jun, International Champions Cup Singapore football championship in Jul, and Grand Prix in Sep) which would attract tourists, it still lacked the biennial events that took place in 2H18, such as the International Water Week in Jul 2018, events related to Singapore’s ASEAN chairmanship throughout 2018, and the Bloomberg Forum in Nov 2018.
  • In addition, the softer economic conditions could continue to dampen demand for business travels. 2020F should be a better year given the return of biennial events while supply stays low.

Trimming our forecasts for the hospitality REITs

  • Given the weaker-than-expected tourist arrivals and RevPAR performance in 5M19, we now expect 1-2% y-o-y growth in tourist arrivals in 2019F (3% previously) vs. hotel room supply growth of 3%. We expect ~1% improvement in average room rate on the back of higher occupancy. All in, we expect flat 2019F RevPAR to 1% y-o-y growth. For 2020F, we expect RevPAR to grow 2-3% on the back of 2-3% y-o-y growth in tourist arrivals and ~1% growth in hotel room supply.
  • In tandem with the tweak in our industry RevPAR expectations, we reduce our RevPAR assumptions for the hospitality REITs under our coverage. We reduce CDL Hospitality Trusts’s FY19-21F DPU by 3-6% after lowering our Singapore FY19-21 RevPAR forecasts from 3-7% to 1-3%, in line with the management’s guidance of 1-3%. We also take the opportunity to factor in higher pre-opening expenses for Raffles Maldives. Slow tourist arrivals aside, 2QFY19 results would also be dragged down by the ramp-up of Raffles Maldives, and Orchard Hotel which is still under renovation.
  • As long as tourist arrivals stay stable, we see stronger results for 2H19F as Raffles Maldives Meradhoo will open its door gradually starting from 2Q19 and the refurbishment works at Orchard Hotel (accounted for 21.3% of CDL Hospitality Trusts’s FY18 Singapore net property income, NPI) and Lowry Hotel complete by 3Q19 and May 2019, respectively. Based on our sensitivity analysis, a 1% pt reduction in its Singapore RevPAR will trim our FY19 DPU forecast by 0.7%. ~56% of CDL Hospitality Trusts’s FY18 NPI was generated from its Singapore hotel.
  • We also cut our FY19-21 DPU forecasts for Far East Hospitality Trust by 5-7%, and reduce our FY19-21 RevPAR forecasts from 3-4% to 1-2%. We also increase our borrowing cost forecast as we raise our interest rate assumption to be in line with its 1QFY19 results. We do not expect strong RevPAR growth in 2Q19F given the high base effect as the biennial Food & Hotel Asia was held in Apr last year. Far East Hospitality Trust also benefited from higher occupancy during the Trump-Kim Summit last year. In addition, the acquisition of Oasia Hotel Downtown was completed in Apr 2018, making 2Q y-o-y comparison more comparable.

Maintain Overweight on overall REIT

  • We believe the market has priced in the soft operating environment as reflected by the sector’s attractive valuations despite the benign interest rate environment. Hospitality REITs continue to trade at average 12-year valuations in terms of dividend yield vs. other subsectors which have re-rated close to +1 s.d. of 12- year mean. The sector is also currently trading at an average of 4.1% dividend yield spread versus 3.9% in 2013-2017 when the sector was hit by strong supply which resulted in negative RevPAR. In a worst case scenario, assuming a 10% downside to our 2019 DPU forecast, the hospitality REITs still offer at least ~5% dividend yield.
  • The sector's hotel room supply remains tight and we believe the weakness in tourist arrivals and RevPAR performance is temporary due to this year’s slower events calendar. We believe RevPAR performance would rebound in 2020F as biennial events return while supply remains low.

Our preferred stock in the hospitality subsector remains CDL Hospitality Trusts.

For the overall REIT sector, we prefer Suntec REIT and Mapletree Commercial Trust.

  • We think the share price overhang on Suntec REIT (SGX:T82U) has been removed after its acquisition of an office building in Australia and the deployment of part of its private placement proceeds raised earlier.
  • Potential acquisition of assets from its sponsor's pipeline which we have not factored into our forecasts yet, could be a major re-rating catalysts for both Mapletree Commercial Trust (SGX:N2IU) and Keppel DC REIT (SGX:AJBU).
  • We also expect both Suntec REIT and Mapletree Commercial Trust to benefit from an upcycle in office leasing.
  • We maintain our Overweight rating on the overall REIT sector in view of the protracted low interest rate outlook. While the sector is currently trading close to +1 s.d. of 12-year mean in terms of dividend yield and P/BV, we believe such an elevated valuation would persist in this yield-hungry environment.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-24
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