SINGAPORE (July 21): CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have lowered their industry revenue per available room (RevPAR) growth forecast for Singapore REITs (S-REITs) to 40-50% from 60-70%.

This is due to a weaker-than-expected recovery in tourist arrivals for 2H20. The analysts say their previous forecasts assumed an average of 80% recovery in tourist arrivals, but they now assume a recovery of 30% of last year’s arrivals.

“Singaporeans are unlikely to be able to travel for leisure this year. This could indicate that Singapore may not open its borders fully to foreign leisure travellers in the near term,” they write in a note dated July 20.

The update came after National Development Minister Lawrence Wong said Singapore’s travel advisory position is unlikely to change in the near term as COVID-19 remains widespread around the world on July 17. 

However, negotiations with countries on reciprocal green arrangements will proceed to facilitate essential business travel.

On the “challenging environment”, Eing and Lock cite Ascott Residence Trust (ART) and CDL Hospitality Trust (CDLHT)’s recent profit warnings, which guided that both trusts are expecting their distribution per units (DPUs) to decline by 65-75% and 60-70% respectively.

Hence, the analysts have reduced ART’s and CDLHT’s FY20-22F DPU by 18-53% and 16-36% respectively, factoring in larger declines in RevPAR/RevPAU. 

“We believe FEHT (Far East Hospitality Trust) is in a better position vis-à-vis ART and CDLHT given its hotels are fully backed by master leases. We expect a very gradual recovery for the hospitality sector as countries open their borders cautiously”, they say. 

Eing and Lock have maintained their “add” calls for ART, CDLHT, and FEHT, as the market appears to have already priced in the potential downside risks.

“The REITs [are] currently trading at 0.6-0.8x P/BV which appears to have factored in at least a 15% asset valuation decline for the REITs, based on our analysis”, they add.

The analysts cite JLL’s forecast of a 15-20% decline in valuation against the 2019 peak. The commercial real estate firm believes this may be mitigated by strong financial position and long-term view of the hotel owners, low level of supply and safe haven status of Singapore. 

“While the sector lacks catalysts in the near-term for share price outperformance, we reiterate ‘add’ on ART, CDLHT and FEHT as value has emerged. Upside risks include capital distribution, better RevPAR/RevPAU and earlier opening of borders, while downside risks include prolonged border closures,” they say.

Eing and Lock have issued target prices for ART, CDLHT, and FEHT, at $1.06, $1.20, and 59.2 cents, respectively.

In a recent report, the World Tourism Organisation (UNWTO) said international arrivals declined 44% y-o-y in January to April, and plunged 97% y-o-y in April. For the full year 2020, UNWTO expects international tourist numbers to deteriorate 58-78% y-o-y.

The analysts note that while ART’s geographically diversified portfolio has, under usual business conditions, provided resilience to earnings, extensive global travel restrictions have impacted the occupancy at its assets.

As for CDLHT, its overseas operations are either closed on a temporary basis or operating at low occupancy rates except for its hotel in New Zealand.

However, the occupancy rates of its Singapore and New Zealand hotels have been supported by isolation demand. Singapore hotel occupancy is also supported by demand from foreign workers affected by border closures.

The analysts said CDLHT will have to tap on domestic demand, as the borders of most countries remain closed to most foreigners. 

In 2019, Singapore, New Zealand, and the UK accounted for about 79% of its revenue. With COVID-19 cases under control so far in these countries, CDLHT could at least tap into the domestic demand there.

As of 12.06 pm today, shares of ART, CDLHT, and FEHT were trading at 95 cents, $1.03, and 50 cents respectively.