Hospitality REITs - CGS-CIMB Research 2020-10-01: Slower-Than-Expected Recovery

Hospitality REITs - CGS-CIMB Research | SGinvestors.io CDL HOSPITALITY TRUSTS (SGX:J85) ASCOTT RESIDENCE TRUST (SGX:HMN) FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Hospitality REITs - Slower-Than-Expected Recovery




Lower 2021-22 DPU forecasts to factor in slower-than-expected recovery

  • We had previously expected tourist arrivals to recover gradually starting in 2H20. However, given the slower-than-expected recovery, with Singapore only allowing tourists from 4 countries (New Zealand and Brunei from 1 Sep and Australia and Vietnam from 8 Oct – which collectively accounted for 10% of the total arrivals in 2019) so far and Aug 20 foreign arrivals only accounting for 0.5% of Jul 2019, we think our FY21-22F RevPAR assumption of S$120-S$150 (+17% to +85% y-o-y) is overly bullish.
  • While we maintain our Singapore occupancy assumption for the REITs at about 70-80% in FY21-22, we tone down our Singapore ADR assumption from S$160- 170 to S$100-S$160 as we now assume
    1. higher occupancy to be generated from alternative business which commands lower room rates and
    2. lower occupancy tourists which pay higher rates.
  • Overall, we cut CDL Hospitality Trusts (SGX:J85) Singapore and Far East Hospitality Trust (SGX:Q5T)’s FY21-22 RevPAR forecasts by 23-26% and 32-33%, respectively. We also reduce CDL Hospitality Trusts’s overseas RevPAR by 2-25%. Hence, FY21-22F DPU for CDL Hospitality Trusts and Far East Hospitality Trust have also been adjusted downwards by 9-20% and 15- 27%, respectively. We also lower Ascott Residence Trust (SGX:HMN)’s FY20-22 DPU forecast by 3-8%, factoring in weaker-than-expected RevPAR recovery for weaker markets.
  • We were not alone in expecting the border restrictions to be lifted by end-2020. According to the survey done by JLL, a property consultancy company in Mar 20, 81% of the 61 hotels it interviewed had expected border restrictions to be lifted by end-2020. In its Aug 20 survey, however, 45% of the hotels now expect border restrictions to be lifted in 4-6 months while another 44% think border restrictions will be enforced for the next 7 to 12 months.
  • We have assumed that a full recovery would only be seen in 2024 which is in line with STB’s expectations of a 3-5 year recovery journey for the hospitality sector.


Gradual reopening of Singapore border, baby steps to recovery

  • Since 2Q20, Singapore has launched green/fast lanes with China (Chongqing, Guangdong, Jiangsu, Shanghai, Tianjin and Zhejiang), Malaysia, South Korea and recently Japan. Singapore has also made its first steps to open borders to tourists by allowing tourists from Brunei and New Zealand to enter Singapore from 1 Sep 2020. Yesterday, Singapore announced that it will be lifting border restrictions for some visitors from Australia (excluding Victoria state) and Vietnam from 8 Oct 2020. While arrivals from these countries (Brunei, New Zealand, Australia and Vietnam) only made up 10% of Singapore’s 2019 total arrivals, this is nonetheless an encouraging step towards the reopening of borders and recovery of the hospitality sector, albeit at a gradual pace.
  • Based on our checks, of the countries which contribute more than 1% of Singapore’s total tourist arrivals in 2019, Thailand, Taiwan, China, Vietnam, Malaysia and Australia have better controlled COVID-19 cases at only single-to double-digit new cases daily (as at 14 Sep) or ratio of new cases (first 14 days of Sep) to total cases of < 0.5%. Barring a resurgence in COVID-19 cases, these countries (excluding Australia and Vietnam which are now allowed to enter Singapore from 8 Oct onwards) which collectively accounted for c.30% of Singapore’s total tourist arrivals in 2019, could be next on the list of countries that Singapore may open its borders to.


Encouraging staycation demand on weekends and during school holidays in Singapore


Hoteliers are offering promotions to attract local guests.

  • While awaiting for Singapore to open up general travel to more countries, hoteliers have been giving out promotions such as early check-in, late check-out, free breakfast, room upgrades, entertainment vouchers, meals and premium service discounts to get a pie of the staycation business.

Government launched S$320m tourism credits.

  • The government has also done its part by giving each Singaporeans S$100 vouchers which can be used on staycations, attraction tickets and tours from Dec 2020 to Jun 2021. We believe this would help to boost spending on attractions and staycations as S$100 could subsidise 25% to 100% of room rates. This initiative which amounted to S$320m is about 2.5x of the total industry hotel revenue of S$136m in 2Q20.
  • Since only 214 hotels or c.32,000 rooms (46% of total room supply in 2019) are approved for staycations thus far, we think it would help to boost occupancy. We understand that more hotels were approved for vacations as they were dropped from the government hotel booking scheme.

Staycation demand has been encouraging.

  • We understand from the REITs that the demand for staycations has been encouraging. While staycation bookings on non-peak season weekdays is moderate, we understand that there have been no issues in filling occupancy up to the permitted capacity (1 person per 10 sqm) during weekends and school holidays.
  • We expect m-o-m improvement in RevPAR in the next few months as we think staycation demand would improve gradually towards year end as we approach the holiday season. Google Mobility also shows that Singaporeans are returning back to normalcy with time spent out of the home gradually increasing.

Staycation could boost industry monthly RevPAR by 25%.

  • To give a sense of the potential effect of staycation demand on hotel occupancy in Singapore, we estimate staycation demand based on the size of Singapore households and compare it to the number of approved rooms which are likely to benefit from staycations. Assuming only 5-20% of Singapore’s households would opt for a two-night staycation in the next 3 months, we estimate that this will boost hotels’ (hotels with more than 200 rooms, at least four-star rated and approved for staycation), occupancy by ~28% over 3 months which is on top of other alternative businesses (excluding SHN), if any.
  • In addition, staycation room rates are also much higher than room rates offered by alternative businesses, potentially boosting industry monthly RevPAR by 25% compared to Aug 20, based on our estimates using Aug 2020 RevPAR as a guidance.

Hospitality REITs have limited rooms for staycation.

  • Among the REITs, CDL Hospitality Trusts could have the highest number of rooms available for staycations at c.22% of the total number of its rooms in Singapore. Ascott Residence Trust and Far East Hospitality Trust (excluding serviced residences) have less than 20% and 10% of total rooms available for staycations, respectively, as the bulk have been booked for alternative businesses.


Overseas occupancy has been improving on a m-o-m basis but a resurgence of cases may cap performance

  • Overseas, we note that occupancy has been improving on a m-o-m basis, especially in Europe, as countries have largely opened borders within the region (14% of Ascott Residence Trust’s 1HFY20 revenue; 24% of CDL Hospitality Trusts’s 1HFY20 revenue). However, with the resurgence of COVID-19 cases in many countries recently, including European countries, we may see occupancy tapering off in the next few months.
  • Some countries in Europe such as the Czech Republic and Montenegro are seeing higher case numbers in Aug that they did earlier in the year. Belgium, Italy and the UK are also seeing a resurgence although so far it is nothing like Mar and Apr. France, Poland, the Netherlands and Spain are also seeing a record high number of cases. With Europe’s weekly COVID-19 infections now higher than the continent’s first COVID-19 cases peak in Mar, WHO warned of “serious” COVID-19 surge in Europe. Countries in Asia that have seen a resurgence of COVID-19 cases in Sep versus Aug include Indonesia, Nepal and India.
  • Based on our estimates, c.35% of population globally are seeing daily new cases in the triple-digits and experienced at least a double-digit increase (in percentage) in daily cases in Sep versus Aug 20.


Expect softer demand from alternative business in Singapore going forward


Singapore hotel occupancy remained high, thanks to alternative business.

  • We understand that the listed hotels’ occupancies in Singapore remained high at > 90% although room rates are low, supported by alternative businesses such as stay-home-notice (SHN) and foreign workers who need to reside in Singapore temporarily due to border closures.

65-69% of the REITs’ hotel rooms are blocked for the next few months.

  • Our checks revealed that one of Ascott Residence Trust’s properties (47% of total rooms in Singapore) in Singapore has been blocked until mid-Oct 20, while another property (22% of total rooms in Singapore) is blocked until mid-Mar 2021.
  • Four of CDL Hospitality Trusts’s hotels (65% of total rooms in Singapore) are not available for bookings until 31 Oct 2020.
  • As for Far East Hospitality Trust, eight of its hotels (including 30%-owned 3 Sentosa Hotels) are blocked until 19 Jan 2021. Two of Far East Hospitality Trust’s serviced residence properties are also blocked until early to end-Oct 20 to house foreign workers. In total, Far East Hospitality Trust blocked out 64% of its total number of rooms/units in Singapore (including its 30%-owned 3 Sentosa Hotels and serviced residence). The blocking out of hotel rooms indicates that the REIT believes alternative business will continue for the next few months.

Government block-bookings are likely to decline going forward.

  • However, in our view, given the well-contained COVID-19 cases in Singapore and with more travellers (Singaporeans/ PRs/ long-term pass holders and travellers from low-risk countries) being allowed to serve their SHN at their place of residence, we expect the demand and rental rates for SHN facilities to decline gradually going forward.
  • While staycation business is good for publicity and commands higher room rates, we believe that hoteliers would likely hold onto the government block-booking scheme even at competitive rates. This is because block-bookings give 100% occupancy rate although underlying occupancy may not be 100%. This helps to save operating cost and support margins.
  • Our base case scenario assumes that the government would gradually trim down the block-booking of hotels in a more aggressive manner in 2021 but still maintain its exposure in the hotel space throughout the year. We expect this to be partially offset by more special travel arrangements with low-risk countries which will improve tourist arrivals and average ADR rate.

Same goes for foreign workers demand.

  • In terms of demand from foreign workers, we understand that there has been a gradual decline in demand from foreign workers although there was also new demand from serving the 7-day stay-home-notice. With Malaysia looking to reopen its border fully with Singapore, the demand from foreign workers could weaken further in 2021. We estimate that 10-30% of the REITs’ occupancy in Singapore are supported by this business.


Upcoming master leases are likely to be renewed on less favourable terms

  • Given the weak operating environment, Ascott Residence Trust has seen its master lessee for three of its properties in Japan, WBF, filed for civil rehabilitation while CDL Hospitality Trusts has made impairments for its German (€1.6m impairment vs. fixed rent of €3.6m per annum) and Italian (€1m impairment vs. fixed rent €1.3m per annum) hotels.
  • We believe the upcoming master leases are likely to be renewed on less favourable terms. Recall that in 1H20, Ascott Residence Trust’s four expired French Master leases were extended on variable rent terms and three expired UK management contracts with minimum guaranteed income were converted to management contracts for one year.
  • Going forward, we understand that there are seven more contracts up for renewal by Dec 2020 for Ascott Residence Trust and 6.4% of CDL Hospitality Trusts’s income (master leases from its Australian hotels) will be up for renewal in 2021.
  • Far East Hospitality Trust is not concerned about lease renewals or rent default as the leases are leased to the sponsor and the earliest expiries would start in 2032.


Making vaccines available globally remains a challenge


Vaccines may be available soon.

  • According to WHO, there are more than 300 vaccine candidates in total and about 40 are being tested on humans and only nine of those have reached implementation of phase 3 trials. According to Financial Times, scientists forecast that the timeline for the first vaccine to present positive phase 3 trial results could be from Oct this year, at the earliest, to mid-2021, at the latest.

But making it available globally is a challenge.

  • While a COVID-19 vaccine may become available soon, the journey to making it widely available may take more time due to challenges such as
    1. manufacturing capacity constraints and
    2. uneven purchasing power among countries which would mean that countries that can afford to buy vaccine stocks in advance get first access and poorer nations would miss out or have to wait for a long period.

Manufacturing capacity constraints.

  • WHO’s “fair allocation mechanism” proposes distributing vaccines in two phases. In the first phase, all countries would only receive vaccines proportional to their population. Initial doses will be to immunise 3% of the population with priority given to frontline healthcare workers. Additional vaccines would be delivered until 20% of the nation’s population is covered. In the second phase, more vaccines would be delivered to countries based on how urgently immunisations are needed.

Uneven allocation of vaccines.

  • According to the media, the uneven distribution of new vaccines has happened on at least two previous occasions. In 2007, despite Indonesia sharing its H5N1 virus samples with WHO and being one of the worst-affected countries, it did not have access to cheap vaccines. In 2009, wealthier nations also bought up almost all the stock of H1N1 influenza vaccines, crowding out less-developed countries.

China and the US have not joined WHO’s plan to fairly distribute COVID-19 vaccine.

  • While WHO announced on 21 Sep 2020 that countries who have joined its plan to buy and fairly distribute COVID-19 vaccines represented 2/3 of the world’s population, China and the US which collectively accounted for 23% of the world’s population are still absent from WHO’s list.


Which REIT could see a faster recovery?

  • To get a sense of which REIT could potentially see a quicker recovery, we estimate the exposure of the REITs to countries which
    1. have well-controlled COVID-19 cases (defined as the number of daily new cases less than 100) and have a ratio of new cases (first 14 days of Sep) to total cases of < 0.5%, and
    2. could benefit from domestic travel which we expect to see recovery first before international travel.
  • Of the countries that the REITs have a presence in, Australia, China, Malaysia, New Zealand and Vietnam fit the above criteria. Based on 1HFY20 revenue, Ascott Residence Trust has 35% revenue contribution from these countries while CDL Hospitality Trusts has 19%. Based on just exposure to countries with domestic demand, Ascott Residence Trust has 89% based on 1HFY20 revenue, much higher than its peers’ 0-43%.
  • Using the number of rooms as a gauge of the REITs’ exposure to countries which have well-controlled COVID-19 cases and are large enough to support domestic travel gave us similar results.


Sector outlook remains uncertain but we believe the market has priced in potential impact

  • The sector is lacking near-term catalysts as the business environment remains uncertain with different news/data pointing in different directions. While more countries have relaxed their borders recently and vaccines are being developed, there has also been a resurgence of COVID-19 cases. However, we believe the market has priced in the impact of COVID-19 as the REITs are trading at 0.6-0.7x P/BV which have priced in 15-20% asset devaluation. This can be seen from the stable share price performance when the REITs released their weak results in Jul.
  • Hence, we reiterate ADD on Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust at lower target prices after we cut our RevPAR for FY21-22 to factor in a slower-than-expected recovery.
  • Our revised target prices for CDL Hospitality Trusts and Far East Hospitality Trust implied 0.73-0.77x P/BV which has factored in c.20% of asset devaluation versus JLL’s expectations of 10-15% in 2021.
  • As for Ascott Residence Trust, our implied P/BV would be 0.85x which has factored in about 10% asset devaluation which we think is reasonable given that COVID-19 has less of an impact on serviced residences.

Prefer Far East Hospitality Trust and Ascott Residence Trust






EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-01
SGX Stock Analyst Report ADD MAINTAIN ADD 1.16 DOWN 1.200
ADD MAINTAIN ADD 1.05 DOWN 1.080
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