UOB Kay Hian analyst Jonathan Koh has maintained that investors should “overweight” their portfolios on S-REITs, with his top picks coming from the hospitality sector. 

He has given “buy” ratings to Ascott Residence Trust, CDL Hospitality Trust, and Far East Hospitality Trust, with target prices of $1.29, $1.42 and 74 cents respectively.

In a Jan 6 report, Koh is of the view that the sector’s recovery is  “delayed but not disrupted”. 

This is because Singapore’s borders and vaccinated travel lanes (VTLs) still remain open, albeit with reduced capacity. Singapore has established quarantine-free VTLs with 24 countries or regions, which accounted for 56% of visitor arrivals pre-Covid-19 during 2019.

The Causeway also remains open, although with an enhanced testing protocol.

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Furthermore, he thinks the Omicron variant is less lethal than previously thought, adding several studies have concluded that the Omicron variant is less likely to cause severe illnesses. 

The majority of those who succumbed to breakthrough infections or reinfections experienced mild symptoms.

For Ascott Residence Trust, he points out that it has completed the acquisition of four student accommodation assets in the US, with a total of 1,651 beds for US$213 million ($291.2 million). 

The assets are in Pennsylvania, North Carolina and Ohio, and serve five reputable universities with strong athletics programmes. They were completed between 2019 and 2020 and have a weighted average occupancy rate of 94% for the 2021 academic year.

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The four assets are expected to provide an EBITDA yield of 4.9%, and are also estimated to increase pro forma 2020 distribution per unit (DPU) by 3%. 

The acquisition will be 92% funded by debt,  and 8% funded by the remaining proceeds from a  private placement completed in September 2021. ART’s gearing remains healthy at 37.8% post-acquisition.

As for CDLHT, Koh says that the contribution from W Hotel in Singapore was boosted by staycation demand., adding that “W Hotel benefits from buoyant staycation demand as Sentosa Island provides Singaporeans with the closest semblance to an overseas holiday.”  

He estimates that W Hotel’s revenue per available room (RevPAR) has rebounded 28% q-o-q to S$221 in 3QFY2021, and expects further upside with RevPAR increasing 27% q-o-q to $280 in 4QFY2021.

Overseas, CDLHT’s Grand Millennium Auckland has served as a managed isolation facility since 2Q20, and he foresees the government contract continuing into 1QFY2022. 

The hotel, which is the largest in Auckland and centrally located within the CBD, contributed 29.6% of net property income (NPI) in 3QFY2021.

As for FEHT, Koh thinks that the $313.2 million divestment of Central Square is “judicious” and that the divestment proceeds will be used to pare down debt to strengthen FEHT’s balance
sheet. Aggregate leverage is expected to decrease from 41.3% to 33.5%.

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FEHT (owner of Central Square) and City Developments (owner of the adjacent Central Mall) have received outline advice from the Urban Redevelopment Authority (URA) to redevelop Central Square and Central Mall under the strategic development incentive scheme, with a 78% increase in maximum permissible gross floor area (GFA) to 341,840 sq ft. 

He highlights that FEHT has downside protection from a high fixed rent component, calling it “the most defensive hospitality REIT in Singapore.”

FEHT’s nine hotels and three serviced residences are under master lease agreements with subsidiaries within sponsor Far East Organisation (FEO). 

The fixed rent component from its master leases totalled $67 million per year, which is equivalent to 72% of total gross revenue from its hotels and SRs in 2019 (pre-Covid-19).

These fixed rents formed about 81% of 1HFY2021’s gross revenue, and the 20-year master leases run till 2032.

However, he has cut his 2022 DPU forecast by 29% due to weakness caused by the Omicron variant in 1HFY2022, and also trimmed his 2023 DPU forecast by 2.5% due to divestment of Central Square, offset by lower interest expense.

Sector catalysts are the reopening of borders in Singapore through the expansion of capacity for existing VTLs, as well as the introduction of new VTLs in the second half of 2022 after the country weathers the Omicron variant wave.