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Worst is over for Singapore hospitality sector but bumpy road to recovery lies ahead, says OCBC

Atiqah Mokhtar
Atiqah Mokhtar3/9/2021 4:1 PM GMT+08  • 3 min read
Worst is over for Singapore hospitality sector but bumpy road to recovery lies ahead, says OCBC
Ascott Residence Trust remains OCBC's top pick for the sector.
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Singapore hospitality REITs can expect a gradual recovery ahead, though a lot will depend on the rollout of vaccines and the reopening of borders globally.

OCBC Research analyst Chu Peng has “turned more positive” on the outlook for hospitality REITs as vaccination drives kick in and expects revenue per average room (RevPAR) to see a strong recovery in H2FY2021 on the back of pent-up demand.

Assuming vaccines will be widely available by mid-2021, she anticipates RevPAR to fully recover to pre-Covid-19 levels by 2022 or 2023.

Against this backdrop of recovery, Ascott Residence Trust (ART) remains OCBC’s top pick for Singapore hospitality REITs, with a ‘buy’ call and fair value estimatw of $1.24. This is followed by CDL Hospitality Trusts (CDHLT) and Far East Hospitality Trust (FEHT), both with ‘buy’ ratings and fair value estimates of $1.40 and 66 cents respectively.

SEE:CRCT cut to 'sell' by OCBC on equity fundraising pain for mall acquisitions

Chu cites ART’s diversified portfolio, higher concentration of assets in the Asia Pacific region which is better-poised for recovery, and strong financial position for her recommendation.

In addition, she notes that ART has approximately $200 million of undistributed capital gains which could go towards smoothening any loss in DPU from divestments or further impact of Covid-19.

The positive view comes after a challenging year for hospitality REITs following border closures and muted travel demand.

“The three hospitality REITs under our coverage ended 2020 with net property income falling 30.8%-50.9% while DPU fell 36.7%-60.2% y-o-y on weaker performances and divestments,” Chu says.

However, FY2020 capital distributions for ART and CDLHT still managed to beat Chu’s expectations, thanks to top-ups from divestment gains and retained distributable income.

Looking ahead, Chu believes that the worst is over, though the pace of recovery is likely to be uneven as different countries have shown varying levels of bouncing back from the pandemic. She notes that countries with large domestic markets and lower infection rates such as China and Singapore are leading the recovery.

She also anticipates that while borders remain closed amidst the rollout of vaccines, the performance of hospitality REITs will continue to be supported by fixed rent components in master leases and management contracts with minimum guaranteed income, in addition to government bookings for isolation purposes and domestic demand in FY2021.

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Chu believes valuations for ART, CDLHT and FEHT are still undemanding, with ART and CLHT currently trading at forward P/B ratios below their historical means.

“We believe valuations are still undemanding for ART, CDLHT and FEHT especially given the positive progress on vaccines and a more visible roadmap to recovery in 2021,” she says.

As at 3.45pm shares in ART, CDLHT and FEHT are trading at $1.05, $1.23, and 59 cents respectively.

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