S-REITs Bi-Weekly - UOB Kay Hian 2020-09-02: Recovery Plays Among The Top Gainers

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FAR EAST HOSPITALITY TRUST (SGX:Q5T) FRASERS HOSPITALITY TRUST (SGX:ACV)

S-REITs Bi-Weekly - Recovery Plays Among The Top Gainers

• S-REITs gained marginally by 0.3% during 16-31 Aug 20. We saw many recovery plays, such as retail REITs (Frasers Centrepoint Trust, Lendlease REIT, Mapletree North Asia Commercial Trust and CapitaLand Mall Trust) and hospitality REITs (Far East Hospitality Trust and ARA US Hospitality Trust), among the top gainers. Conversely, industrial REITs (Frasers Logistics & Commercial Trust, Mapletree Industrial Trust and Ascendas REIT) have lost some momentum.
• Maintain OVERWEIGHT on S-REITs.
• BUY
  • retail REITs CapitaLand Mall Trust (SGX:C38U) (Target: S$2.55) and Frasers Centrepoint Trust (SGX:J69U) (Target: S$2.90),
  • hospitality REIT Far East Hospitality Trust (Target: S$0.58) and
  • office REIT Keppel REIT (SGX:K71U) (Target: S$1.30).

WHAT HAPPENED LAST 2 WEEK (16-31 Aug 20)

UOBKH S-REIT Index gained marginally by 0.3% to 247.4 in the past two weeks.

• Singapore has started the process of gradually re-opening its borders. We have lifted border restrictions to travellers from Brunei and New Zealand where their COVID-19 situations are assessed to be well under control and risk of importation is low. With effect from 1 Sep 20, travellers who stayed in Brunei and New Zealand in the last 14 consecutive days will not be required to serve the Stay Home Notice (SHN). However, they have to apply for an Air Travel Pass (ATP) and undergo COVID-19 test upon arrival at Changi Airport.

Top outperformers:

• Retail REITs Frasers Centrepoint Trust, Lendlease REIT, Mapletree North Asia Commercial Trust and CapitaLand Mall Trust gained 7.2%, 4.8%, 4.4% and 3.7% respectively in the past two weeks.
• Hospitality REITs Far East Hospitality Trust and ARA US Hospitality Trust increased 5.8% and 4.4% respectively.
• Healthcare REIT Parkway Life REIT was up 6.2%.

Top underperformers:

• First REIT (SGX:AW9U) dropped 16.8%. The REIT has granted rental relief of two months for May and June and more rental relief is being considered for 2H20.
• Industrial REITs Frasers Logistics & Commercial Trust, Mapletree Industrial Trust and Ascendas REIT lost 2.9%, 2.9% and 2.6% respectively as investors switch towards recovery plays in the retail and hospitality sectors.
• See
  • S-REITs Share Price Performance;
  • S-REITs Target Price & Rating.

SPOTLIGHT – Hospitality REITs

More reciprocal green lanes on the way.

• Currently, Singapore has reciprocal green lane arrangements for visitors on business and official trips from China and Malaysia, where travellers are subjected to COVID-19 swab tests 48 hours before departure and upon arrival. Singapore is also working to establish green lane arrangements for essential travel with Japan, including a special quota for work pass holders and a reciprocal green lane for short-term business trips, to be finalised by September.

Extending green lanes to tourists.

• Singapore will introduce the reciprocal green lane for tourists from countries where the COVID-19 situation is similar to or better than Singapore. Leisure travellers from these countries will be exempted from the 14-day quarantine. The Ministry of Transport estimated that including transfer-transit traffic, these safer countries account for about 40% of our pre-COVID-19 passenger volumes at Changi Airport. The government will consider replacing the 14-day isolation, which is a deterrent to travellers, with a rigorous testing regime.

Slight easing in duration of quarantine.

• The government has also shortened the SHN duration from 14 days to 7 days for travellers from other low-risk countries and regions, such as Australia (excluding Victoria state), Macao, China, Taiwan, Vietnam and Malaysia. The COVID-19 test will be administered before the end of the 7-day SHN.

Re-opening while keeping COVID-19 transmission at bay.

• Singapore has to gradually re-open its borders so as to maintain Changi Airport’s hub status. The challenge is to restore passenger volume, while keeping virus transmission under control.
• BUY Far East Hospitality Trust (Target: S$0.58) and Frasers Hospitality Trust (Target: S$0.54). Both stocks trade at an attractive discount of almost 40% to NAV.

Far East Hospitality Trust (SGX:Q5T) (BUY/ Target Price: S$0.58)

Rewarded with fixed rents while waiting for recovery.

• Far East Hospitality Trust (SGX:Q5T) is a pure play on Singapore’s hospitality sector. Far East Hospitality Trust’s master leases provide downside protection with fixed rents accounting for 72% of rental income from its hotels and serviced residences in 2019. Far East Hospitality Trust is able to weather the COVID-19 storm due to its master leases with sponsor FEO that runs till 2032.

Business mix for hotels shifted to government contracts.

• Far East Hospitality Trust improved its hotel occupancy by 24.6ppt q-o-q to 89.9% in 2Q20 due to contracts from government agencies for isolation purposes and companies that required their Malaysian workers to be housed in Singapore. Occupancy for its serviced residences remained high at 81.8% due to longer leases from corporate accounts.

Trading at 36% discount to NAV.

• Our target price is S$0.58, based on DDM (required rate of return: 7.5%, terminal growth: 1.8%). Distribution yield should improve to 5.7% in 2021. Far East Hospitality Trust trades at P/NAV of 0.64x.
• 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.

Frasers Hospitality Trust (SGX:ACV) (BUY/ Target Price: S$0.54)

Riding on domestic travel in Australia and the UK.

• Frasers Hospitality Trust (SGX:ACV) provides a geographically diversified exposure with 15 quality properties across nine key gateway cities in Asia, Australia and Europe. We see potential for recovery in domestic travel in Australia (36% of NPI) and the UK (16% of NPI). In particular, the UK has established travel corridors which will usher in tourists, especially from continental Europe.

Six properties in the UK have re-opened.

• Frasers Hospitality Trust’s properties in Australia, Japan (12% of NPI) and the UK will recover sooner as these countries have sizeable domestic travel markets. All but two of Frasers Hospitality Trust’s properties have resumed business operations (all hotels in the UK and Malaysia were closed in 3QFY20). ibis Styles London Gloucester Road is expected to re-open in mid-August.

Trading at 38% discount to NAV.

• Our target price is S$0.54, based on DDM (required rate of return: 7.5%, terminal growth: 1.8%). Distribution yield should improve to 7.6% in FY22. Frasers Hospitality Trust trades at P/NAV of 0.62x.
• See Frasers Hospitality Trust Share Price; Frasers Hospitality Trust Target Price; Frasers Hospitality Trust Analyst Reports; Frasers Hospitality Trust Dividend History; Frasers Hospitality Trust Announcements; Frasers Hospitality Trust Latest News.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-02

SGX Stock Analyst Report BUY MAINTAIN BUY 0.58 DOWN 0.620

BUY MAINTAIN BUY 0.540 SAME 0.540