SINGAPORE (May 29): The hospitality sector continues to be the worst performing sector. Despite their pedigree, CDL Hospitality Trusts (CDL-HT) and Ascott Residence Trust (ART) ranked among the REITs with the highest yields (see chart 1), based on their historic DPUs. REITs with high yields have a problem in that their cost of capital is high and equity fund raising will be difficult. While the circuit breaker in Singapore will be gradually lifted from June and Europe has started to lift its lockdowns, tourism is unlikely to stage a quick recovery. Hence, the hospitality REITs may continue to trade at high yields this year.

ARA US Hospitality Trust (ARA H-Trust) has a different problem. Unlike CDLHT and ART, which have their sponsors providing master leases and minimum rent guarantees, ARA H-Trust has no master lease. Hence its net property income of US$3.6 million ($5.1 million) in 1QFY2020 ended March was 68.2% lower than its IPO forecast of US$11.3 million. On a brighter note, ARA H-Trust’s manager says it “remained in compliance with all loan covenants as at March 31, 2020, and has not defaulted on any payments under its loan facilities. The Singapore-based relationship banks which provided the financing for ARA H-Trust’s IPO and acquisition of the three Marriott branded hotels, have granted waivers on the financial covenants under both loan facilities for the following 12 months, that is from April 1, 2020, up to March 31, 2021.” Its peer, Eagle Hospitality Trust, defaulted on its loans.

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