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Hospitality REITs are "heading for a good start": CGS-CIMB

Felicia Tan
Felicia Tan • 3 min read
Hospitality REITs are "heading for a good start": CGS-CIMB
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee believe hospitality REITs in Singapore are “heading for a good start”.
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SINGAPORE (June 9): CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee believe hospitality REITs in Singapore are “heading for a good start”.

On the “fast lane” arrangements with China, Eing and Lock believe this is a “big move in the right direction”.

Moving forward, Eing and Lock are positive that there will be more “fast lane” arrangements with New Zealand, South Korea, Australia, and Malaysia, as Singapore are in talks with these countries.

“CDL Hospitality Trust (CDLHT) and Far East Hospitality Trust (FEHT) would be the main beneficiaries of the current and ongoing fast lane arrangements given their large exposure in Singapore (49% of revenue for CDLHT and 81% for FEHT from its hotel and serviced residence segments),” state Eing and Lock in a Friday (June 5) report.

“CDLHT and FEHT generate [around] 50% and 30% of their Singapore revenue from corporates, respectively, and we believe both REITs have about 10% revenue exposure to Chinese tourists,” they add.

Conversely, Ascott Residence Trust (ART), which generates most of its revenue from corporates given its focus on serviced residences, would have a slower recovery process due to its diversified revenue stream.

“In FY19, ART generated [some] 9% of its revenue in Singapore and we estimate this to decline to ~8% in FY20 after the merger with Ascendas Hospitality Trust,” say the analysts.

Due to the decline in tourist arrivals and circuit breaker measures in Singapore, the country’s hotel revenue per available room (RevPAR) plunged 80% y-o-y on lower occupancy and average room rates. However, this was mitigated by the stay-home-notice for citizens returning home from overseas, and Malaysian workers due to Malaysia’s border closures.

Believing that the hospitality industry will see a “gradual recovery” moving forward, Eing and Lock have maintained their FY20 industry RevPAR forecast of 40-50%.

On hospitality REITs, the analysts have estimated a 30% to 40% RevPAR and 15% to 40% RevPAU y-o-y decline in FY20.

“We expect CDLHT to see the strongest rebound post Covid-19 given its high-country concentration and its status as the bellwether of [the] hospitality industry. We also like FEHT for its more resilient income given the high proportion of master lease income from its sponsor,” they note.

“We believe our FY20F DPU forecast for FEHT has the least downside risk given that we have trimmed our forecast near to its minimum income,” they add.

ART may recover at a more gradual pace under this situation as compared to the REITs which have higher revenue concentration. Near-term catalyst would be the potential inclusion into the FTSE EPRA NAREIT Developed Index in Jun 20. The stock is trading near 0.84x P/BV, near 1 s.d. below mean.

The analysts have maintained their “add” calls on Ascott Residence Trust, CDL Hospitality Trust, and Far East Hospitality Trust, with target prices of $1.21, $1.31, and $0.59 respectively.

“ART, CDLHT and FEHT are trading at 0.84x, 0.72x and 0.64x P/BV which we believe have priced in the negative impact from Covid-19. ART’s potential inclusion into the FTSE EPRA NAREIT Developed Index in June 20 would serve as an immediate re-rating catalyst for the stock,” they say.

See also: Ascott Residence Trust to join FTSE EPRA Nareit Global Developed Index

As at 10.18am, units in Ascott Residence Trust are changing hands 0.9% up at $1.13; units in CDL Hospitality Trust 0.8% up at $1.20; and Far East Hospitality Trust flat at 57 cents.

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