Hospitality REITs Singapore - CGS-CIMB Research 2020-04-28: No Near-Term Catalysts

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ASCOTT RESIDENCE TRUST (SGX:HMN) CDL HOSPITALITY TRUSTS (SGX:J85) FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Hospitality REITs Singapore - No Near-Term Catalysts

• Industry RevPAR plunged by 41% in Feb and we expect Mar to be worse.
• Cut REITs’ FY20 DPU by 24-40%, factoring in -20 to 50% RevPAR/RevPAU.
• CDL Hospitality Trusts may see the strongest rebound post Covid-19.

Believe market has priced in fundamental downside from Covid-19

• Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust’s share prices have been bashed down by 32%, 46% and 26% since 1 Jan 2020. The REITs are now trading at 0.67x P/BV, 0.59x P/BV and 0.57x P/BV, respectively.
  • Ascott Residence Trust Share Price
  • CDL Hospitality Trusts Share Price
  • Far East Hospitality Trust Share Price
  • S-REITs Share Price Performance.
• Given the sharp decline in share prices which indicate that downside risks may have been priced in, we reiterate ADD on CDL Hospitality Trusts (SGX:J85) (Target Price: S$1.31) and upgrade both Ascott Residence Trust (SGX:HMN) (Target price: S$1.21) and Far East Hospitality Trust (SGX:Q5T) (Target Price: S$0.59) from Hold to ADD.
• While we think that value has emerged, we see few catalysts for near-term share price outperformance. In terms of recovery, we recommend investors look out for CDL Hospitality Trusts as we expect it to see the strongest rebound post Covid-19.
• We also like Far East Hospitality Trust for its more resilient income given the high proportion of master lease income from its sponsor.
• Despite the recent sell-down, as of now, based on our calculations, Ascott Residence Trust is on track to join the FTSE EPRA NAREIT Developed Index by Jun 20 which could serve as a near-term rerating catalyst.

Industry saw RevPAR plunge in Feb 2020

• Singapore closed its borders to all new visitors from mainland China on 31 Jan 2020. It also raised the DORSCON level from yellow to orange on 7 Feb. This caused Feb 2020 tourist arrivals to plunge by 50% y-o-y although Jan 2020 was still up 3.9% y-o-y. We expect arrivals in Mar to be worse as Singapore banned arrivals from more countries and subsequently banned all short-term visitors on 23 Mar 2020.
• In tandem with the weak arrivals, Singapore Feb 2020 hotel RevPAR dipped 41% y-o-y to S$117 versus Jan RevPAR of +5.2% y-o-y. CDL Hospitality Trusts released its 1QFY20 update last Friday. The REIT saw 15% to 40% y-o-y RevPAR decline from all markets as Covid-19 started to impact the industry materially last month. This led to a 41.2% y-o-y decline in its 1QFY20 NPI.

Tempering our forecast

• We reduce hospitality REITs’ FY20 DPU forecasts by 24-40%, factoring in 20-50% decline in RevPAR/RevPAU. In FY21, we factor in +9% to +46% RevPAR/RevPAU as travel demand should resume while supply remains low. We forecast industry RevPAR to drop by 40-50% (from 15-20%) in 2020, mainly dragged down by lower occupancy.
• We expect RevPAR to recover by 50-60% y-o-y in FY21. The return of biennial events could further boost RevPAR by ~15% y-o-y in 2022.

Ascott Residence Trust (SGX:HMN)

• We reduce Ascott Residence Trust’s FY20-22 DPU forecasts by 10-31% with the decline mainly from management contracts. We incorporate the effect of the merger with Ascendas Hospitality which was completed on 31 Dec 2019 and bake in
  1. -20% to -50% RevPAU/RevPAR decline in FY20 with countries with shorter average length of stay properties to be impacted more as well as
  2. lower operating cost from government assistance and cost-cutting initiatives into our forecasts.
• Our FY20-21 include capital distribution from divestments. While we raise our FY21- 22 revenue and gross profit, our FY21-22 DPU is still lower than our previous forecast due to the enlarged share base post-merger.
• Master lease income accounted for 27% of Ascott Residence Trust’s 2019 gross profit but in FY20F, we expect its master lease income to account for ~50% of our FY20F NPI due to the contribution of master lease income from Ascendas post-merger and as income from management contracts fall due to Covid-19.
• During the Global Financial Crisis, Ascott Residence Trust’s occupancy rate declined from 80% in FY08 to 75% in FY09 while RevPAU dropped 16% y-o-y in FY09.
• 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.

CDL Hospitality Trusts (SGX:J85)

• CDL Hospitality Trusts released its 1QFY20 business update last Friday. See CDL Hospitality Trusts Announcements. 1QFY20 revenue and NPI declined 28.7% y-o-y to S$33m and S$19.6m, respectively. This came in at 15% and 14% of our previous full-year revenue and NPI forecasts of S$214.7m and S$141.1m, respectively.
• In 1QFY20, Singapore’s RevPAR fell 39.8% y-o-y due to lower occupancy of 53.9% while ADR declined marginally. Recall that Singapore closed its border entirely on 23 Mar which has had a profound impact on hotel occupancy. Fortunately, this was partially offset by accommodation demand from foreign workers affected by border closures, mainly from Malaysian workers as Malaysia closed its border from 18 Mar. There was also demand from returnees from overseas serving out Stay Home Notices in hotels. Management indicated that they are still seeing demand from returnees serving Stay Home Notices. CDL Hospitality Trusts is likely to receive only minimum master lease income in 2Q as the REIT bears a full quarter impact from Covid-19.
• In the Maldives, Angsana Velavaru saw a 31% y-o-y contraction in RevPAR while the gestation of Raffles Maldives Meradhoo was disrupted due to Covid-19. The hotel was closed on 1 Apr 2020 to contain costs prior to the low season. While hotels continue to receive fixed rent in 1Q20, income was impacted by the weaker AUD. In New Zealand, Grand Millennium Auckland’s RevPAR declined 15% y-o-y although it saw strong occupancy before the country closed its border on 19 Mar. To be prudent, the REIT has chosen to recognise only base rent in 1Q20. Given the deteriorating trading environment, it is likely that any variable rent reported in 1Q would be reversed later.
• Despite healthy occupancies in 1Q20, its hotels in Tokyo posted RevPAR decline of 33.6% y-o-y due to competition. UK hotels dropped 27.3% due to weak corporate demand in the lead up to the mandated closure of hotels on 24 Mar 2020. Lastly, in Munich, fewer events during the quarter due to seasonality as well as Covid-19 impact from Mar onwards dragged Pullman Hotel Munich’s RevPAR by 37% y-o-y.
• The weak performance in 1Q despite Covid-19 only affecting travel materially in Mar 20, signifies the profound impact of Covid-19 on the hotel industry. We reduce our FY20-22 DPU forecasts for CDL Hospitality Trusts by 3-40%, factoring in a ~36% decline in RevPAR (58% occupancy rate and 8% decline in average room rates) in FY20 before rebounding by ~46% y-o-y in FY21 (75% occupancy rate and +5% average room rate). We expect travel demand to recover at a more gradual pace due to the fear of travelling after Covid-19 while corporate demand may remain relatively weak. We have penciled in RevPAR recovery of +16% in FY22 (85% occupancy rate and +5% room rate) due to the return of biennial events. We expect CDL Hospitality Trusts’s fixed rent to account for ~64% of FY20 NPI versus 37.5% in FY19.
• 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.

Far East Hospitality Trust (SGX:Q5T)

• We reduce our FY20-22 DPU forecasts by 11-24%. For its hotel segment (we estimate 64.2% of FY20 revenue), we factor in a ~40% decline in RevPAR (58% occupancy rate; 8% decline in average room rates) in FY20 before recovering by ~36% y-o-y in FY21. In FY22, we expect an +18% improvement in RevPAR due to the return of biennial events.
• We expect its serviced residences (13.4% of revenue in FY20F) to be more resilient than its hotel segment given the longer average length of stay. We have imputed a 15% decline (70% occupancy rate, 0% improvement in unit rate) and +9% (75% occupancy; +2% unit rate) in RevPAU in FY20 and FY21, respectively.
• We expect Far East Hospitality Trust’s income to be more resilient than Ascott Residence Trust and CDL Hospitality Trusts. Master lease income accounted for 64% of Far East Hospitality Trust’s FY19 NPI and we forecast this to increase to 83% of our FY20F NPI. 100% of the properties are on master lease contracts. The remaining 22% of NPI in FY20 will be generated from the retail and office segments.
• 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.

No liquidity concerns

• Only CDL Hospitality Trusts and Ascott Residence Trust were listed during the GFC. While Ascott Residence Trust’s 2019 gearing and interest coverage ratio (ICR) have improved vs. the 2009 level, CDL Hospitality Trusts’s ratio has deteriorated.
• Note that CDL Hospitality Trusts’s gearing was one of the lowest in 2009. Having said that, both REITs’ current gearing remain healthy at 33.6% and 37.4%, respectively, which gives them substantial debt headroom to meet their operational obligations. In addition, both REITs have enough cash and cash equivalent to cover 1.6x to 2.3x of their operating expenses, including interest expense. Although Far East Hospitality Trust’s gearing is the highest at 39.2%, Far East Hospitality Trust still has high debt headroom of S$295m versus its S$41m operating expenses, including interest expense in FY20. The higher gearing limit of 50% will provide further comfort.

Valuation & Recommendation

• Given CDL Hospitality Trusts’s (60% of revenue in Singapore) and Far East Hospitality Trust’s (100% of revenue in Singapore) higher country concentration, we believe these two hospitality REITs would see a stronger rebound when travel activities resume. This was demonstrated by the faster recovery of CDL Hospitality Trusts versus Ascott Residence Trust during the GFC. Far East Hospitality Trust was not listed during GFC.
• Comparing CDL Hospitality Trusts (90% revenue contributed from Singapore in 2009) and Ascott Residence Trust’s recovery during the GFC, CDL Hospitality Trusts had 90% of revenue exposure in Singapore while Ascott Residence Trust was diversified across 7 countries in 2009. CDL Hospitality Trusts has since diversified its income and currently generates about 60% of its revenue from Singapore while Ascott Residence Trust is present in 15 countries.
• While CDL Hospitality Trusts’s revenue declined more than Ascott Residence Trust in 2009, it also recovered faster in 2010. Being in the serviced residences space, the slower recovery from Ascott Residence Trust could also be due to the slower recovery in corporate demand which we believe contributed to the bulk of its revenue given the long average length of stay of 7 months. In terms of valuation recovery post GFC, CDL Hospitality Trusts also saw a stronger recovery compared to Ascott Residence Trust as CDL Hospitality Trusts’s P/BV recovered to pre-GFC levels in 2010.
• Among the three REITs, we believe our FY20F DPU forecast for Far East Hospitality Trust has the least downside risk given that we have trimmed our forecast near to its minimum income. All of its assets are backed by master leases from its sponsor. The stock is currently trading at 0.57x P/BV, lower than its peers. Based on our revised DPU forecast, it still offers a good 4.2% yield spread vs. Ascott Residence Trust and CDL Hospitality Trusts’s yield spread of 5.2% and 5.3%, respectively.

See attached PDF report for complete analysis and S-REITs peer comparison table.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-28

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