Singapore Hospitality REITs - DBS Research 2020-04-21: The Next Privatisation Candidate

Singapore Hospitality REITs - DBS Group Research | SGinvestors.io CDL HOSPITALITY TRUSTS (SGX:J85) ASCOTT RESIDENCE TRUST (SGX:HMN) FRASERS HOSPITALITY TRUST (SGX:ACV) FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Singapore Hospitality REITs - The Next Privatisation Candidate




Curtailed travel demand weigh heavily on prices.

  • The share prices of the hospitality S-REITs’ have understandably been under pressure since the start of the COVID-19 outbreak given the restrictions in travel on the back of lockdown by various governments across the world.
  • In response to this change in operating environment, we note that some hospitality S-REITs have closed their hotel operations (especially hotels in Singapore) or are actively looking to manage costs in order to maintain profitability or in many cases, stem further operating losses (gross operating profits or GOP) in the midst of more restrictions to corporate travel and leisure activities globally.

Master leases offer protection.

  • Hospitality S-REITs earn their rental income pegged to the higher of
    1. a ratio of underlying operating income (% of revenues and % of gross operating profits) or
    2. fixed rent (or a revenue floor).
  • Based on our estimates, the fixed rent component contributes around 33% to as high as 77% of our revenue estimates. Far East Hospitality Trust (SGX:Q5T) and OUE Commercial REIT (SGX:TS0U) (hotel component only) have the highest (70+% range).
  • On our estimates and assuming only the fixed rent is payable (including those with minimum income guarantees) across the various hospitality assets, we find that the distribution per unit (“DPU”) ranges from 1.5 Scts to 2.6 Scts, translating to a yield of c.2%-5% at current prices.


Hospitality REITs – it is all about the Sponsor


Sponsor support important.

  • Based on reported RevPARs from the various S-REITs, we estimate that most hotels generate more than the rental commitment that the master-lessee pays to the REITs as rental income. The difference is a form of buffer for
    1. payment of hotel operator management fees,
    2. Furniture, Fittings, and Equipment Reserve (FF&E) reserves, and
    3. reserves for the master lessee for use during a “rainy season”.
  • With the expected drop in revenues in 2020, we believe that most of the hospitality S-REITs will depend on their own master-lessee for support (or top up to the minimum rent), if underlying operating income falls below the fixed rent component of the revenue structure.
  • Given that most of the master-lessees for the hospitality S-REITs are mainly subsidiaries (and affiliates) of their respective Sponsors, we believe that such top-ups can be counted upon, given the symbiotic relationships that the Sponsor and S-REITs have, and as major shareholder of the S-REITs.
  • We however note that for Ascott Residence Trust (SGX:HMN) and CDL Hospitality Trusts (SGX:J85) who have over the years expanded overseas and as such fixed rent component only contribute c.33%-38% of revenues.

Earnings weakness this year, with light in FY21F.

  • We have revised our estimates across the hospitality SREITs to factor in a sharp decline in global travel demand. Our base case scenario assumes that:
    1. FY20F portfolio occupancy will drop to 50%, on par with levels experienced during GFC,
    2. FY20F ADR to decline by 20% y-o-y compared to our previous growth forecast of 2-3% and
    3. a recovery only in FY21F, as occupancy rises to 75% and ADR to rebound to normal rates.
  • On the basis of a 2-year normalisation period across FY20 and FY21, our RevPAR will be 47% and 88% of FY19 levels for FY20 and FY21 respectively. Based on our revised DPUs, FY20F dividend yields will be compressed to the range of 3.8% to 5.6% (previously 4.9% - 5.4%) on current share prices.

Adjusted assumptions to price in negative sentiment.



Hospitality REITs – the next privatisation candidates?

  • Given the depressed share prices, hospitality S-REITs are trading at an implied 0.7x-0.8x EV/Asset and most are trading below replacement costs. Thus, we believe that current levels are attractive entry points for hospitality S-REITs at 0.5x-0.6x P/NAV, which is close to -2 SD of their mean, and reflects negatives of a plunge in earnings in 2020.
  • Hotel stocks trading below replacement costs. Implied valuations on a per room basis (or key) is attractive at S$0.5m- 1.2m/room (even after stripping off an assumed 20% discount to valuations of its overseas hotels), which means that it is far cheaper to buy these stocks than a physical hotel. As hotel sites in Singapore are rare and only periodically offered in the government land sales (GLS) programme, transaction prices and bids tend to be robust and prices have trended higher over the years with implied development cost for a hotel averaging S$780k/key. The latest land bid in Club Street to Worldwide Development for S$562m (c.S$2,190psf) in Jan’19 is the highest price ever for a hotel site in Singapore, and replacement cost will likely trend even higher.
  • In fact, given that the hospitality S-REITs have not been active in raising equity in recent years, we believe that the current share price levels maybe a buy-out opportunity for Sponsors, if they do decide to take the S-REITs private. Based on our estimates, even at a 25% premium to current prices, Sponsors of Frasers Hospitality Trust and Far East Hospitality Trust would require between S$450m to S$600m to gain control of an attractive portfolio of hotel properties.

See attached 36-page PDF report for complete analysis.






Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-04-21
SGX Stock Analyst Report BUY MAINTAIN BUY 1.30 DOWN 1.750
BUY MAINTAIN BUY 1.10 DOWN 1.500
BUY UPGRADE HOLD 0.65 DOWN 0.780
BUY UPGRADE HOLD 0.60 DOWN 0.690



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