Singapore Hospitality - DBS Research 2019-10-31: This Time It’s Real!


Singapore Hospitality - This Time It’s Real!

  • Optimism settling into hospitality REITs as the sector approaches a cyclical upturn in 2020.
  • Average occupancies close to 90%; anticipate room rate growth to drive DPUs higher.
  • Potential M&A within the sector to surprise investors on both NAV and DPU fronts.
  • Upgrade Far East Hospitality Trust to a BUY; CDL Hospitality Trusts and Ascott Residence Trust to benefit more if they sell their stakes in integrated Liang Court development.

At the turn of the corner.

  • We believe that we are at the cusp of a sustained turn in the performance of the Singapore hospitality sector. With a robust line-up of returning and inaugural conferences in 2020, we anticipate a higher number of visitors to translate into stronger demand for rooms.
  • With supply growth falling back to only c.1.5% in 2020 and average hotel occupancies at close to c.90%, the next leg of growth will be driven by room rates.

Impending catalyst for the sector.

The hospitality REITs have missed the rally this year; could lead the next.

  • While we may be early in our call, we note that hospitality REITs have generally missed the S-REITs rally in 2019 and still trade at their 5-year historical mean yield spread. We believe downside is limited at current levels. If history is a guide, the fourth quarters of odd-numbered years starting 2011 have delivered average share price and total returns of 15-18% over the following six months. See S-REITs share price performance

Key statistics imply an impending upturn.

  • Singapore hospitality sector gathering pace. Four Hospitality REITs reported today their operating results that show much promise, in our view. See
  • While DPUs in the quarter remain lower y-o-y, we are sensing optimism settling into most hospitality S-REIT managers. In their feedback to analysts call, we gather that most feel that the recovery for the hospitality sector is gathering pace, especially for Singapore, and the muted supply growth in 2020 will aid in the overall recovery of the sector going forward. The potential boost from the leisure market come 4Q19 will be a near-term catalyst to higher-than-expected RevPAR growth.
  • The key demand drivers for 2020 will come mainly from the strong line-up of new and returning conferences like the Air show in February 2020 and new conferences which will be opportunities for the hotel REITs to capture in 2020.
  • We note that portfolio occupancy rates have remained high at > 90% which we believe is at the upper bound of what hotels can operate at; which means that if demand remains strong, most hoteliers are expected to start to inch up room rates, this means that the next leg of growth will come from expected hikes in average daily rate (ADR), which will drive a new level of profitability for the hospitality S-REITs going into 2020.
  • Looking ahead, we believe that the likes of FAR EAST HOSPITALITY TRUST (SGX:Q5T) and CDL HOSPITALITY TRUSTS (SGX:J85) will continue to benefit from this increasing RevPAR trend given their 100% and 62% exposure in earnings to Singapore-based serviced residences and hotels.
  • On average, the sector is expected to deliver a 3% growth in RevPAR for 2020 with every 1% increase in RevPAR having a 0.3-0.5% impact on distributions.

Key events to push visitor arrivals to a new high

Meetings Quarter Expected no. of attendees
Singapore Airshow 1Q20 48,000 (2018 attendance)
Food and Hotel Asia April’20 (2Q20) 78,000
The International Trademark Association 142th conference April’20 (2Q20) 11,000
103rd Lions Club International Convention Mid 2020 20,000
Industrial Transformation Asia-Pacific (ITAP) Oct’20 18,000
Gamescom Asia Oct’20 30,000

Is it time to buy?

Generally, a profitable trade.

  • We believe that the sector is at the cusp of recovery. Notwithstanding that distribution per unit (DPU) performance in 3Q19 was mixed with most hoteliers reporting a y-o-y decline, we believe that the stronger growth outlook will spur a re-rating of the sector over time.
  • While a certain level of optimism could come from the expected spike in demand for accommodation come 2020, the past trading trends for the hospitality S-REITs could lend some support. History tells us that in the odd-numbered years of 2013, 2015, 2017 and now 2019, the fourth quarter of the year tends to be the bottom for the sector. Taking CDL Hospitality Trusts’s trading history as an example, the average share price return and total returns from the lows in 4Q of 2011, 2013, 2015, and 2017 are 15% (ranging from 8-30%) and 19% (ranging from 13-33%) respectively.
  • With the hospitality REITs missing out on the REIT rally in 2019 and the sector trading at historical mean valuations (yield, yield spread and P/NAV) compared to the sector average at +1 standard deviation (SD), we believe that downside from current levels is limited.
  • We believe that Far East Hospitality Trust (Upgrade to BUY, Target Price S$0.80) and CDL Hospitality Trusts (BUY, Target Price S$1.80) are prime beneficiaries on the projected stronger outlook for the hospitality sector. Ascott Residence Trust is also expected to see upside from potential acquisitions given its under-geared balance sheet supported by a recovering organic growth outlook.

CDL HOSPITALITY TRUSTS (SGX:J85): 3Q19 results below

Key Results Highlights

  • Revenues and net property income (NPI) were down 1.8% and 1.5% respectively on the back of lower performance from its overseas hotels (New Zealand, Maldives [closure of one resort], Tokyo) which were impacted by competition while Munich reported fewer events.
  • The weaker currencies (AUD, NZD, GBP, EUR vs the SGD) also had an impact on NPI.
  • This was somewhat compensated by the rise in NPI contribution from its SG hotels (+6.5% y-o-y in 3Q19, -1% YTD19) and contribution from Hotel Cerrentani Florence.
  • See CDL Hospitality Trust Announcements; CDL Hospitality Trust Dividend History.


  • In the first 27 days of October, RevPAR for Singapore hotels inched up 0.2% (y-o-y) on the back of strong leisure travel market.
  • Despite the uncertain global economic environment, the limited future supply will support demand levels. If the economic environment remains stable going forward, there could be a 2-3% RevPAR growth in 2020.
  • The situation will remain challenging in Australia and New Zealand with the influx of new hotel supply, and the weaker currencies. Its Maldives resorts’ performance has been affected my new supply growth, but the government's efforts to boost tourism should see a boost in demand going forward.
  • Tokyo also faces an increase in new supply, but the upcoming Tokyo Olympics and Paralympics will provide rate-maximising opportunities in 2020. RevPAR for hotels in the UK remained flat due to increasing hotel room inventory in the near term, but the selective AEIs should lend support to protect RevPAR.
  • Going forward, CDL Hospitality Trusts will likely carry out selective AEIs within the Singapore portfolio to boost their attractiveness and protect RevPAR in the face of upcoming new supply.
  • See CDL Hospitality Trust Share Price; CDL Hospitality Trust Target Price.

FAR EAST HOSPITALITY TRUST (SGX:Q5T): 3Q19 results in line

Key Results Highlights

  • Revenues and net property income rose by 1.2% and 1.3% to S$30.9m and S$28.1m respectively.
  • This was mainly attributable to improved RevPAR performance (+5.7% in 3Q19 to S$196/night ; +3.0% 9M19) from their serviced residences (SR) while its hotels RevPAR is showing a gradual improvement y-o-y coming in flat at S$152/night but down 1.5% on a 9M19 basis.
  • Distributable income came in 1.5% higher at S$20.4m.
  • DPU dipped marginally by 1.0% to 1.04 Scts on expanded share base due to shares issued for dividend reinvestment programme. See Far East Hospitality Trust Dividend History.
  • 9M19 DPU forms 75% of forecasts.
  • See Far East Hospitality Trust Announcements.


  • After a slow start to the first half of the year, there was a marked improvement in overall performance of the hotels and service residences. In 3Q19, both segments saw healthier average occupancy of 92.3% and 88.2% respectively, likely due to the increase in international visitor arrivals. Despite the anticipated upcoming new supply, the pace of increase is relatively moderate as compared to the increases over the last few years.
  • The additional supply is expected to be well-absorbed by the projected growth in tourist arrivals and the ongoing efforts and initiatives put forth by the government to increase new flight connections and growing pipeline of exhibitions and events.
  • Expecting the stabilisation of contribution from the newly completed Sentosa hotels, and optimistic about prospects in 2020 due to inaugural MICE events.
  • See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price.


Key Results Highlights

  • FY2019 DPS of 4.41 cents (7.3% lower y-o-y) on the back of weaker performance from the Australian and Malaysian portfolios, in line with expectations. See Frasers Hospitality Trust Dividend History.
  • Overall portfolio RevPAR for Australia declined 2.9% y-o-y on the back of soft market conditions in Sydney and Melbourne.
  • The Westin Kuala Lumpur saw a RevPAR decline of 2.3% y-o-y due to lower ADR and weaker F&B revenue.
  • ANA Crowne Plaza Kobe registered a slight decline in operating profit of 0.7% due to higher operating costs.
  • All properties in the UK portfolio registered healthy gains in occupancy, resulting in portfolio RevPAR increasing by 9.2% y-o-y.
  • Higher occupancy for the full year at the two Singapore properties led to a 1.3% growth in RevPAR.
  • Portfolio valuation fell marginally by 2.9% y-o-y, mainly due to weaker GBP, MYR and EUR. In local currency terms, only Australian properties saw a decline (-5.2%) in valuation due to challenging market conditions in Sydney and Melbourne.
  • See Frasers Hospitality Trust Announcements.


  • The Singapore portfolio saw strong leisure and corporate demand in the transient segment which drove average occupancy levels to above 90%. Positive on the outlook.
  • Australian hotels continue to face a challenging landscape from new supply, but the portfolio's prime location in the heart of Sydney and Melbourne is expected to remain resilient. The weaker GBP led to higher holiday visits to the UK, but the continued economic and political uncertainty paints an unclear outlook in the near term. Japan portfolio expected to experience a tailwind from the recent Rugby World Cup and the upcoming 2020 Tokyo Olympics. New hotel supply in Japan is also expected to soften after 2020. Upscale and luxury hotels continue to dominate incoming supply, and strong competition has led to lower ADR in 2019. However, this has been partially offset by a 4.9% growth in tourist arrivals to Malaysia.
  • Continues to look out for potential acquisitions in the fundamentally strong markets of Europe such as Germany and Holland, and would like to evaluate off-market private deals that offer better yields. AEIs will also drive organic growth for Malaysia, Japan and Australia hotels.
  • See Frasers Hospitality Trust Share Price; Frasers Hospitality Trust Target Price.

ASCOTT RESIDENCE TRUST (SGX:A68U): 3Q19 results in line

Key Results Highlights

  • 3Q19 revenues and gross profit came in 2% lower and 1% higher respectively at S$132.4m and S$65.0m respectively. Distributable income was 6% higher at S$41.6m, translating into a DPU of 1.91 Scts. See Ascott REIT Dividend History.
  • Revenue was down due to decrease in contribution from the divestment of Ascott Raffles Place. Operationally, we saw better performance from selected cities in UK and Europe (Belgium, UK and Spain) and in Asia (Vietnam, Indonesia, Philippines and Singapore). This is, however, offset by weaker y-o-y growth from its properties in Australia, China, Japan and US.
  • Overall RevPAU was down by 2% in 3Q19.
  • Gearing remains under-geared at c.33% with ample headroom for debt-funded acquisitions.
  • Potential interest savings from the refinancing of its upcoming perpetuals in June 2020 and upcoming debt in JPY could present upside to our estimates.
  • See Ascott REIT Announcements.


  • Adjusted RevPAR (adjusted for the divestment of Ascott Raffles Place) for Singapore portfolio was up 2% y-o-y. This was due to higher variable rent as a result of stronger corporate and leisure demand. Expected to remain strong with global companies continuing to shift their headquarters to Singapore.
  • Operating environment in Melbourne is expected to be competitive with upcoming new supply, and continue to build corporate base and distribution network for Sydney. China portfolio is faced with softer corporate demand and lower revenue, but is expected to recover with the rise in domestic consumption. Japan RevPau increased due to stronger demand from leisure travellers and stronger performance from serviced residences. UK properties increased due to higher corporate and leisure demand, likely due to a weaker GBP. US assets faced with increasing new supply challenge and higher operating costs. Vietnam properties benefitting from stronger corporate demand, and serviced apartments are increasingly recognised as an alternative to hotels.
  • Low gearing leaves a debt headroom of S$1.1bn and will continue to adopt a global approach. Will first concentrate on the combination with the Ascendas Hospitality Trust portfolio.
  • See Ascott REIT Share Price; Ascott REIT Target Price.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-10-31
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