ASCOTT RESIDENCE TRUST (SGX:HMN)
CDL HOSPITALITY TRUSTS (SGX:J85)
FAR EAST HOSPITALITY TRUST (SGX:Q5T)
Singapore Hospitality REITs - Bottom Fishing Amid Capitulation
- The market is ruled by panic and fear, exacerbated by margin calls and forced selling. P/NAVs for Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust were smashed to 0.57x, 0.46x and 0.44x respectively after 45.9%, 57.1% and 49.3% corrections ytd.
- Investors have to bear with the earnings volatility in 1H20. However, 2020 distribution yields are expected at 8.7% for Ascott Residence Trust, 9.4% for CDL Hospitality Trusts, and 6.9% for Far East Hospitality Trust despite our earnings forecast cut.
- We cut target prices for Ascott Residence Trust (BUY/Target: S$1.24) and CDL Hospitality Trusts (BUY/Target: S$1.34). Upgrade Far East Hospitality Trust from HOLD to BUY (Target: S$0.50).
- Maintain OVERWEIGHT on the sector.
WHAT’S NEW
Decisive actions to suppress COVID-19 outbreak.
- The Singapore government has banned all inbound flights from Wuhan, China since 23 Jan 20. From 1 Feb 20, all visitors with recent travel history to mainland China within the last 14 days will not be allowed entry or transit through Singapore. Similar bans were also imposed on visitors with travel history to Iran and South Korea from 3 Mar 20 and visitors with travel history to Italy, France, Spain and Germany from 15 Mar 20.
- About 70% of recent new COVID-19 cases were imported cases, mostly Singapore residents returning to Singapore after travelling abroad. To prevent more imported cases, the government will impose a 14-day Stay-Home Notice for all Singaporeans and short-term visitors entering Singapore from 21 Mar 20.
Gloomy forecast from STB.
- As of 11 Feb 20, Singapore Tourism Board (STB) had already projected a 25-30% drop in visitor arrivals in 2020 (steeper than the 19% contraction caused by SARS in 2003). They estimated that Singapore would lose an average of 18,000-20,000 international visitors each day due to COVID-19 outbreak. The situation has worsened since the forecast was made.
Hotels bearing brunt of precipitous fall in visitor arrivals.
- Our channel checks indicate that average occupancy for hotels in Singapore hovered at 28-30% in Mar 20. Fortunately, competition was rational as hoteliers did not undercut one another in terms of pricing. Average daily rate (ADR) dropped by a marginal 2% y-o-y in March. This is a deterioration compared to Feb 20 when average occupancy was 48-50% and ADR was flat y-o-y. We estimate that RevPAR has contracted industry-wide by 68% y-o-y in Mar 20.
Serviced residences provide solace.
- The average occupancy for serviced residences in Singapore is 75% in Mar 20. ADR has dropped slightly by 3% y-o-y. We estimate that RevPAR has contracted industry-wide by 14% y-o-y in Mar 20.
ACTION
Hitting rock bottom.
- The market is gripped by intense fear and uncertainty. Hospitality REITs bear the brunt of COVID-19 outbreak with share prices of Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust correcting 45.9%, 57.1% and 49.3% on a ytd basis.
- While financial results are going to be disappointing for 1H20, the selldown, exacerbated by margin calls and forced selling, has brought P/NAV to 0.57x for Ascott Residence Trust, 0.46x for CDL Hospitality Trusts and 0.44x for Far East Hospitality Trust.
Supported by strong sponsors.
- The sponsors of Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust, which are CapitaLand (SGX:C31), Millennium & Copthorne Hotels and Far East Organisation, are established real estate companies with good track record and strong balance sheet.
- We have raised our cost of equity by 1.0ppt to 7.5% and toned down terminal growth from 1.5% to 0.5% in our Dividend Discount Model to value Hospitality REITs. This is done to factor in the harsh and uncertain operating environment facing hospitality REITs.
- We cut our 2020-22F DPU by -1% to -12%. With the escalation of COVID-19, we are factoring in a c.7-8% decline in RevPAR for its Singapore and overseas portfolio in 2020, followed by a recovery in 2021. Ascott Residence Trust's China and Australia portfolios are expected to be more insulated due to their lower dependence on foreign guests. Our revisions also include impact from the Liang Court transaction and AHT merger.
- Maintain BUY on valuation grounds, with a lower target price of S$1.24 (previously S$1.57).
- See Ascott Residence Trust Share Price; Ascott Residence Trust Target Price; Ascott Residence Trust Analyst Reports; Ascott Residence Trust Dividend History; Ascott Residence Trust Announcements; Ascott Residence Trust Latest News.
- We fine-tuned our 2020-22F DPU by -26% to +4%. With more travel limitations added, we are factoring in a steeper 40% RevPAR y-o-y decline (vs 20% previously) for its Singapore portfolio in 2020. For CDL Hospitality Trusts's overseas portfolio, we have factored in smaller RevPAR declines (-20% to 35%), on observations that these markets can still find cushion from their large domestic travel market.
- Our observations suggest that domestic travel is less affected, and will recover faster than international travel, once the global situation recovers. We also make revisions based on the Liang Court transaction.
- We cut our target price to S$1.34 (previous: S$1.89). Maintain BUY on valuation grounds.
- See CDL Hospitality Trusts Share Price; CDL Hospitality Trusts Target Price; CDL Hospitality Trusts Analyst Reports; CDL Hospitality Trusts Dividend History; CDL Hospitality Trusts Announcements; CDL Hospitality Trusts Latest News.
- The negative impact from the COVID-19 outbreak is mitigated by its master lease structure, whereby fixed rents accounted for 72% of Far East Hospitality Trust's 2019 gross revenue. Management estimates that fixed rents kick in when occupancy falls below 70%. Far East Hospitality Trust’s commercial office and retail spaces, which accounted for 19% of 2019 gross revenue, are also unaffected.
- We cut our DPU forecast by 4.8% to 2.60 S cents for 2020 and by 11.8% to 3.44 S cents for 2021. We expect average occupancy for its hotels to further deteriorate to 35% in 2Q20 compared to our previous expectations of 55%. Upgrade to BUY after share price has corrected 49.3% ytd. Our target price of S$0.50 (previously S$0.64) is based on DDM (required rate of return: 7.5%, terminal growth: 0.5%).
- See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price; Far East Hospitality Trust Analyst Reports; Far East Hospitality Trust Dividend History; Far East Hospitality Trust Announcements; Far East Hospitality Trust Latest News.
SECTOR CATALYSTS
- Environment of persistently low interest rates, which will keep interest fixated on yield plays, such as S-REITs.
- Limited supply of new hotel rooms over the next three years.
ASSUMPTION CHANGES
- As mentioned above.
RISKS
- COVID-19 outbreak results in many countries imposing lockdown, which restrains ic activities.
See also
Jonathan Koh CFA
UOB Kay Hian Research
|
Loke Peihao
UOB Kay Hian
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https://research.uobkayhian.com/
2020-03-20
SGX Stock
Analyst Report
1.24
DOWN
1.660
1.34
DOWN
2.050
0.50
DOWN
0.650
