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Gradual recovery expected, but outlook still uncertain for hospitality REITs: CGS-CIMB

Jovi Ho
Jovi Ho • 4 min read
Gradual recovery expected, but outlook still uncertain for hospitality REITs: CGS-CIMB
Revenue per available room (RevPAR) declined between 56% to 95% for hospitality REITs in 3Q20 due to Covid-19.
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Singapore’s hospitality REITs are improving q-o-q, though the outlook remains uncertain, say CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee in an Oct 31 note.

Eing and Lock are maintaining their ‘overweight’ call on Singapore REITs. They recommend ‘add’ on three highlighted companies: Ascott Residence Trust (ART target price: $1.05), CDL Hospitality Trust (CDLHT target price: $1.16) and Far East Hospitality Trust (FEHT target price: 62.9 cents).

The analysts note that revenue per available room (RevPAR) declined between 56% to 95% for hospitality REITs in 3Q20 due to Covid-19. “We expect Singapore government business to gradually decline, partially offset by staycation and special travel arrangements with various countries.”

CDL Hospitality Trust’s (CDLHT) 9M20 net property income (NPI) of $44.9 million, down 56.5% y-o-y, came in at 65% of CGS-CIMB’s full-year forecast.


See: Hospitality to recover only in 2024, REITs affected: CGS-CIMB

Far East Hospitality Trust’s (FEHT) 9M20 distributable income declined 31.7% y-o-y to $37.7 million and came in at 76% of analysts’ full-year forecast.

Compared to 3Q19, CDLHT’s 3Q20 NPI fell 57.4% while FEHT’s declined 36.4%.

On a q-o-q basis, CDLHT’s NPI increased 49.4% while FEHT saw a decline of 4.7%, mainly due to rental rebates given to its commercial tenants, note Eing and Lock.

CDLHT’s and FEHT’s 3Q20 Singapore RevPAR declined 60.9% (on a like-for-like basis, excluding W Hotel) and 55.8% y-o-y, respectively, dragged down mainly by lower average daily rate due to the low room rate from alternative businesses, note Eing and Lock.

That said, the REITs’ RevPAR improved q-o-q by 8.5% (CDLHT) to approximately 5% (FEHT) due to higher occupancy rate which offset the lower room rate which we believe was driven by higher demand from foreign workers.

See also: Frasers Hospitality Trust to be impacted by lockdowns, upcoming results a yardstick for S-REITS: DBS

FEHT secured alternative business early in 2Q20 which partly explained the weaker q-o-q growth.

Overseas, in 3Q20, CDLHT saw between 60% to 95% decline in RevPAR y-o-y, except in New Zealand, which was supported by alternative business, say analysts, while ART’s RevPAU fell 70% y-o-y.

On a q-o-q basis, ART saw encouraging improvement of 27% q-o-q. Countries with strong domestic demand and long stay guests such as China (3Q RevPAU -down 0% y-o-y) and Vietnam (3Q RevPAU down 58% y-o-y) saw more resilient performance, add Eing and Lock.

While FEHT’s leases with the sponsor will not be up for renewal until 2032, ART has 14% of income which is up for renewal in 2020 and 12% in 2021 while CDLHT has two more Australia hotels (after the disposal of Novotel Brisbane) which accounted for 2.3% of 2019 income to be renewed in 2021.

“We believe these leases are unlikely to be renewed at the same level of fixed rent. Given the well-controlled Covid-19 cases in Singapore, we believe the government will gradually reduce its block-booking of hotels. Currently, most of the hotels are contracted until early 2021 but this can be terminated anytime,” say Eing and Lock.

“The weaker block-booking demand could be partially offset by the special travel arrangements set up with various countries as well as staycation business. The outlook is uncertain to us with rising Covid-19 cases. On a brighter note, the REITs have no issue in fulfilling its near-term obligations,” they add.

FEHT remains Eing and Lock’s top pick for the sector given all its properties are backed by master lease income and have limited downside.

For initial recovery before the reopening of international borders, Eing and Lock prefer ART given its high exposure to domestic demand.

“While the sector is lacking near-term catalysts as the business environment remains uncertain, we believe the market has priced in the impact of Covid-19 as the REITs are trading at 0.6-0.7x P/BV, pricing in 15-20% asset devaluation,” say Eing and Lock.

As at 3.16pm, units in Ascott Trust are trading at 87.5 cents, while units in CDL Hospitality Trust are trading at $1.08 and units in Far East Hospitality Trust are trading at 57.5 cents.

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