Singapore Hospitality REITs - DBS Research 2020-10-19: An Eye On Asset Valuations

Singapore Hospitality REITs - DBS Research  | SGinvestors.io CDL HOSPITALITY TRUSTS (SGX:J85) ASCOTT RESIDENCE TRUST (SGX:HMN)

Singapore Hospitality REITs - An Eye On Asset Valuations

  • Profit warning issued by Frasers Hospitality Trust (SGX:ACV) as the REIT continues to be hurt by the travel standstill; FY20 DPU to drop by c.70% y-o-y.
  • Domestic travel to gain faster recovery traction compared to international travel.
  • Sector gearing to increase to c.44% assuming 15-20% decline in valuations; ‘worst case scenario’ priced in at current levels.
  • Top picks for the sector: Ascott Residence Trust (target price: S$1.10) and CDL Hospitality Trusts (target price: S$1.30).

Frasers Hospitality Trust (FHT): Upcoming full year results to be impacted by travel standstill

Our thoughts: A gradual cautious re-opening in 2020; rebound in travel in phases from 2021.

  • It was reported that two of Frasers Hospitality Trust’s hotels – ibis Styles London Gloucester Road and The Westin Kuala Lumpur remain closed. We estimate that these hotels only contributed c.7% of revenues pre-COVID. This is already an improvement compared to the quarter ended June 2020 where six UK hotels and The Westin KL were closed.
  • The steady re-opening of the hotels across the portfolio is positive to cashflows to Frasers Hospitality Trust, albeit current occupancy levels will likely be close to breakeven levels rather than profitable. The exceptions are the Singapore hospitality assets (c.21% of revenues), Novotel Melbourne on Collins (c.23% of revenues), Sofitel Sydney Wentworth (c.9% of revenues), which continue to churn steady returns and occupancy rates as these properties have benefitted from quarantine business (government led) for returning travellers.
  • Looking ahead, we see the travel industry rebounding in two broad categories, with the domestic travel market gaining traction faster as COVID-19 spread remains under control within borders while international travel (business and leisure) will lag for now.
  • While it appears that some governments are relaxing border controls gradually and introducing safe “travel bubbles” internationally, leisure travel will likely normalise in the medium term, despite acknowledging the strong pent-up demand from holiday-makers.
  • In this respect, we believe that the likes of Ascott Residence Trust (SGX:HMN), CDL Hospitality Trusts (SGX:J85), Frasers Hospitality Trust will see a rebound in travel demand first. Far East Hospitality Trust (SGX:Q5T)’s operational performance will be subject to the re-opening of the Singapore travel market.
  • On the other hand, the ongoing government quarantine business in Singapore supports demand for hotels in the interim.

A read into possible valuation outlook for hotel S-REITs?

  • The significant cashflow disruption will likely result in valuers re-evaluating their cashflow projections to revise valuations and we expect downward pressure possibly to the tune of 10%-20% come year end 2020.
  • Frasers Hospitality Trust is expected to report valuations as at FYE Sep 2020. This in our view, will provide investors with a possible yardstick into how valuations for other hotel S-REITs may look like come the respective year-ends in Dec 2020.
  • Based on our estimate of 10%-20% drop in hotel valuations, most hotel REITs are expected to see an increase in gearing from the current c.38% to c.44%, with the exception of Far East Hospitality Trust where gearing may possibly hit 49% (on the assumption of a 20% drop in valuations). We believe the scenario of a 20% drop in valuations is unlikely given
    1. tight cap rates for transactions in Singapore (hotels are transacted at < 3% yield), and
    2. cashflows are not as severely impacted given the government business in 2020, while the gradual re-opening of borders will be positive for the local hospitality industry over time.

What should investors do?

  • With the sector trading at 0.7x P/NAV, we believe that investors have already priced in a “worst case scenario” of a 20% decline in asset values in terms of current share prices. Investors should look forward to a recovery in 2021.
  • Our picks are Ascott Residence Trust (BUY, Target Price S$1.10) and CDL Hospitality Trusts (BUY, Target Price S$1.30).
  • Risks to our view will be a longer than expected vaccine success (beyond 1Q21) that will continue to have an impact on the travel recovery curve.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-10-19
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