Singapore Hospitality - DBS Research 2021-03-10: Right Time To Pick Up Fallen Angels; Time For Hospitality S-REITs To Shine.


Singapore Hospitality - Right Time To Pick Up Fallen Angels; Time For Hospitality S-REITs To Shine.

  • International travel to pick up more meaningfully towards 2H21, catalysed by “bubble” travels.
  • Herd immunity threshold could be achieved by 3Q21/end-2021 for selected large domestic markets like US and UK, implying a faster rebound in travel.
  • Hospitality S-REITs' valuations attractive at 0.82x P/NAV despite book devaluation; recovery prospects overlooked.
  • Maintain Overweight, top picks Ascott Residence Trust (SGX:HMN) and CDL Hospitality Trusts (SGX:J85).

It is time for the Hospitality S-REITs to shine.

  • The hospitality S-REIT subsector is poised to see better times come 2H21, while expectations and share prices saw a correction in recent times as Singapore border restrictions were tightened on the back of a recent spike in COVID-19 cases globally. That said, with the recent approval of a third vaccine by Johnson & Johnson (J&J) in the US and ongoing mass inoculation of the public globally, we believe that the time to regain flight will not be too far away.

Business ”bubble” travellers touching down in March 2021.

  • The first batch of business ”bubble” travellers can be expected to arrive in Singapore as early as March and reside in Connect@Changi, a purpose-built short-stay accommodation situated within Singapore expo.
  • Connect@Changi is a pilot project first unveiled in December 2020, to allow “business, official and high economic value travellers” to fly into Singapore for up to 14 days. Rates start from S$384 for 24 hours and stays are limited to two weeks. Strict protocols will be enforced where travellers will be tested on arrival and at regular intervals throughout their stay. They will be allowed to meet locals/residents through special function rooms with air-tight glass panels.

Conservative approach to start of international business travel is well warranted to gain confidence.

  • Connect@Changi is backed by Temasek and a collaboration between several government-linked entities including Sheares Healthcare Group, CapitaLand (SGX:C31)'s The Ascott, and Changi Airport Group to name a few. The pilot project will feature an initial 150 guest rooms and 40 meetings room, to be ramped up to 660 guest rooms and 170 meetings rooms in May and scaled up to full capacity later this year to accommodate 1,300 guests.

A vote of confidence with the World Economic Forum (WEF) to be held in August 2021.

  • In our view, the facility provides an insight into how future border opening protocols will be built upon, especially in the near term. These measures in place will have to grow to accommodate the WEF. The 2020 WEF was held in Davos (Switzerland) and hosted over 3,000 participants from 117 countries.
  • Although the scale of the WEF in August 2021 will be smaller, we believe that Singapore’s testbed in launching Connect@Changi project will give attendees confidence in committing their physical attendance for the event, which will be a big boost to Singapore’s statue as a safe hub and events venue in the medium term.

Hotels may jump on this new “travel bubble” scheme.

  • Although, the travel bubble will likely be kept within the Changi precinct at the start and for the World Economic Forum (WEF) to potentially be held at Marina Bay Sands (MBS), there may be a chance for other hotel operators to be appointed as ”bubble hotels” to cater to these travellers, towards the medium term.
  • While the implementation is uncertain for now, the added source of revenues will be positive for hoteliers as most rely on weekend staycations, and government quarantine business to fill their rooms, for now.
  • Expect incremental room demand to benefit the hoteliers with Singapore exposure such as

Travelling in a post-COVID world

  • Maintaining optimism on large domestic markets to emerge ahead of the pack. We maintain our view per outlook report Singapore Hospitality REITs - DBS Research 2020-12-01: Waiting For Lift-Off and we see the recovery being led by overseas large domestic markets hinged on the fact that the overseas hotels will be breaking out of a trough year last and domestic travel will likely lead the recovery in 2021.
  • 3 sweet spots we see fronting the recovery trend are:

(a) Attaining herd immunity by end-2021? Not too far-fetched for certain countries.

Herd immunity a realisable target.

  • Vaccination targets worldwide continue to drive towards herd immunity where at least 60-80% of the population has vaccine coverage, according to various online sources. Singapore, which started its vaccination drive two months ago, is aiming to have its entire population vaccinated by 3Q21. Nations far and wide have set forth similar vaccine targets including large population regions such as the US and EU which had been undoubtedly worse hit by the pandemic.
  • According to S&P, the EU, UK and US could vaccinate 70% of their populations by July this year, subjected to sufficient vaccine production.

UK and US lead the vaccination pack.

  • To date, the UK and US continue to lead the vaccination progress globally and have already administered ~34 and ~27 doses per 100 people, according to data from Our World In Data. Domestic travel restrictions should ease alongside the vaccination roll-out as domestic tourism campaigns will likely follow suit closely to aid sectors that had been at the forefront of the pandemic woes.
  • Looking ahead, we believe the US and much of Europe are poised to emerge from COVID-19 with their vaccination efforts making good progress. The US and UK are leading the race to achieve country herd immunity among the major developed economies. The approval of the single-dose J&J vaccine in the US will further accelerate the vaccination process as more than 20 million doses are expected to be delivered by end-March. Together with the warming weather in the northern hemisphere, the US and Europe look well positioned to control the COVID-19 pandemic.
  • In Singapore, vaccinations are also progressing well at 9.66 doses/100 people in early March. Reports are also showing that vaccinations are being brought forward due to the arrival of more vaccine supplies.

(b) Emerging from a breakeven standstill; higher preference for quality lodging in domestic markets.

Domestic travel markets are at the cusps of recovery.

  • Hotels within large domestic markets are in the early tides of recovery based on our observation where hotels are either still operationally closed or are still ascertaining a breakeven level of room demand. We think that the trend will only be upwards from here given the rock-bottom performance in 2H20. With more room inventory now opened as of end-2020, most hotels are in the “ramp-up” stage but ready to welcome guests once domestic travel restrictions are lifted.
  • The focus of travel in the post-COVID-19 world will be one that is based on safety, hygiene with mass gatherings and events unlikely to be allowed in the near term.

Ascott Residence Trust and Frasers Hospitality Trust have bigger exposure to large global domestic markets.

  • Moreover, with the slow re-bloom of domestic travel, hygiene and safety standards will be a top priority for travelers. In this respect, we think lodging assets within the S-REIT space will stand to benefit at the expense of smaller independent, non-branded hotels.
  • Hotels within the S-REIT space primarily consist of quality assets within the premier category of lodging and service provision (above economy status) managed by renowned hotel operators, or are steered towards the longer-stay lodging segments such as service residences where average room stays are usually above one month, either of which will be much preferred by post-pandemic travellers.
  • In the US, we believe that ARA US Hospitality Trust (SGX:XZL) is best placed to ride this trend given its portfolio of select-service hotels, which cater to the no-frills travel segment. We believe that the REIT remains ahead of peers in the full-service segment which is facing a more challenging reopening due to its operational format. According to STR (December 2020), the percentage of room closed for the full-service hotels are more than double that for select-service and limited-service hotels.

(c) Government-led tourism campaigns to boost tourism spending

Government support should end by 1H21.

  • Most of the hospitality S-REITs have been able to count on the local governments for some support currently when travel is restricted. In Singapore, Australia and even in selected cities in the UK, the hospitality S-REITs have been able to leverage on the government quarantine business where the entire hotel or part of the hotels are blockbooked for quarantine or “stay-home-notice” purposes. While this is expected to taper off somewhat, it is a good source of business in the near term.

Tourism restart in Singapore.

  • Locally, we are well-versed with the SG Re-discover initiative, where S$320 million in credits have been set aside to encourage Singaporeans to spend on attractions, hotel stays and tours, and have been one of the key initiatives boosting domestic staycation demand.
  • Japan rolled out a similar domestic campaign named ”Go To Travel” in late July last year, but has since suspended the campaign two months later as confirmed cases reached a new high. Ironically, the campaign was mocked as the ”Go To Hospital” campaign by internet naysayers, which again shows the delicate balance required in the approach to such campaigns.
  • While the attention of government officials has been much focused on doling out vaccinations currently, tourism campaigns will definitely be within the playing cards towards year-end once nations cross the herd immunity hurdle. Countries with large domestic tourism markets will likely see added incentives by the authorities to spur room demand to support hard-hit domestic travel sectors.
  • Among the hotel S-REITs, Ascott Residence Trust (SGX:HMN) and Frasers Hospitality Trust (SGX:ACV) have the largest exposures to domestic markets at 72% and 59% respectively.

How are our hoteliers coping?

  • Balanced demand drivers. Locally, our hoteliers are balancing between occupancy from government quarantine business, corporate bookings and local staycations (especially on weekends and school holidays). While many hotels that are currently under the Singapore government block booking are operating at full occupancy, these contracts are due to expire between end-1Q21 and 2Q21, although the possibility of an extension is highly likely.
  • Given the stale state of border reopening measures and the suspension of reciprocal green lanes, alternative demand drivers still look lacklustre for the industry. This means that hoteliers will likely remain cost conscious in order to maintain margins and profitability as that demand will continue a slow and steady climb.
  • Fixed sponsor income continues to be a key pillar of cash flow support. The hospitality S-REITs (Ascott Residence Trust (SGX:HMN), Far East Hospitality Trust (SGX:Q5T), CDL Hospitality Trusts (SGX:J85) and Frasers Hospitality Trust (SGX:ACV)), can look towards their sponsors (master lessee) for income support (on the fixed rent components) which limits earnings downside. In addition, the government will be extending its financial assistance and grants, such as the Job Support Scheme, by another six months.

How the balance sheets stack up

Capital values held up better for Singapore assets...

  • On a full-year basis, valuations across the hoteliers fell between 4.4% and 13.5% on a portfolio-wide level. Two key observations made from the valuation reporting are that Singapore hotels generally held up better in terms of capital values in comparison to overseas assets, and long-stay lodging segments saw a smaller dip relative to hotels.
  • Ascott Residence Trust (SGX:HMN)’s portfolio valuation declined 7% y-o-y led by US assets (-17%), China (-11%) and UK (-11%); markets that have more management contracts are likely due for a reset in cashflow projections from valuers. Valuation for Singapore assets remained flat at -1% y-o-y with capital value holding up better than expected.
  • On a similar note, Frasers Hospitality Trust (SGX:ACV)’s Singapore assets (-4.7% y-o-y) held up better in comparison to their overseas peers (-4.7% to -11% y-o-y).

.. and longer-stay lodging segments.

  • Far East Hospitality Trust (SGX:Q5T)’s serviced residences segment declined by only 3.2% y-o-y as opposed to the wider portfolio which declined 4.4% y-o-y. This is attributed to the better underlying performance for the serviced residences (FY20 RevPAR declined 13% to S$159) as opposed to hotels (FY20 RevPAR declined 50% y-o-y to S$71).

Gearing generally within a comfortable range.

  • The average leverage in the sector increased by ~290bps to 40.1% or ~230bps to 38.1% (excluding ARA US Hospitality Trust (SGX:XZL)) from September-December 2020. Some of the hoteliers had taken steps to pare down debts in response to an uptick in gearing and thus saw flattish q-o-q leverage despite a general decline in portfolio value.
  • Based on our sensitivity analysis on the sector prior to a FY20 re-rating in values, the assets have to decline by more than 20% for gearing to trigger the MAS limit of 50%. As written previously, a valuation dip (-4.4% to - 13.5% in 2020) is unlikely given
    1. the 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.

Sharpest portfolio devaluation given full exposure in US a concern to ARA US Hospitality Trust.

  • On the flip side of the coin, capital values for overseas market had been hammered, with US valuations seeing the largest dip. Ascott Residence Trust (SGX:HMN) reported a 17% contraction in the value of its US assets, while ARA US Hospitality Trust (SGX:XZL)’s portfolio valuation retreated 13.5% y-o-y. This had taken a toll on ARA US Hospitality Trust’s balance sheet given its full exposure to the US market and an acquisition made last year that was fully debt-funded. Gearing for the REIT ended FY20 at 48.2%, among the highest within the broader S-REIT sector and close to the 50% gearing limit set by MAS.
  • We understand that covenant waivers are in place until June 2021 and funding restrictions may be imposed after the expiry of the waivers or when gearing breaches the 50% mark. As such, we think that ARA US Hospitality Trust will likely be handicapped in raising additional debt this year and a rebound in valuation will be essential to ease financial fluidity for the REIT come end-2021. This will be much dependent on recovery prospects along the way.

Hospitality S-REITs' valuations

Fallen angels no more.

  • Hotels has been no doubt the worst-performing sector in terms of share price since the onset of the pandemic. The hotels are still down 27% in share prices since end-2019, with the US hotel sector (ARA US Hospitality Trust) trading at approximately half of pre-COVID levels. Recovery prospects had been priced in to a larger extent for the other sectors, which have recovered to -7% (office), -20% (retail) and -0.5% (industrial) of pre-COVID levels as at end-2019.
  • Current price-to-NAV hovers around the mean to -1 standard deviation range for the sector and still remains at attractive levels despite the recent round of devaluation. NAV should also trade up once hotel valuations re-rate by end-2021.

Maintain Overweight on sector; Ascott Residence Trust (SGX:HMN) and CDL Hospitality Trusts (SGX:J85) as our top sector picks.

  • We anticipate the sector to re-rate strongly once domestic travel demand can be ascertained towards year-end.
  • While the sector will likely be repriced as a basket, we prefer Ascott Residence Trust (SGX:HMN) and CDL Hospitality Trusts (SGX:J85) as our top sector picks by virtue of their diversified portfolio holdings with substantial exposure to large domestic travel markets.
  • See the report attached below for complete analysis.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-03-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.200 SAME 1.200