Following an unprecedented three years of disruption since the beginning of the pandemic, the travel and hospitality industry has bounced back in 2023.
The United Nations World Tourism Organization (UNWTO) expects international tourism to fully recover to pre-pandemic levels in 2024, with initial estimates of a 2% growth above 2019 levels, while the International Air Transport Association (IATA) expects about 4.7 billion people to travel by air this year, around 4% more than 2019.
In the Singapore dollar credit space, we identify seven credit issuers whose credit profiles are closely linked to the health of the travel and hospitality sector.
These travel and hospitality credit issuers can be broadly categorised into two sub-categories, the first being air travel-related companies, represented by Singapore Airlines C6L (SIA) and aviation cargo and food solutions provider Sats, which was spun out of SIA in 2009.
The other sub-category comprises hospitality REITs and companies that tend to be owners of hospitality real estate. These may either be managers of the real estate assets they own or where day-to-day management of the assets is outsourced to specialist managers (either third parties or related parties). We include REITs and companies who have a more diversified business profile as their fortunes are linked to the hospitality sector. We count five credit issuers in this sub-category, being CapitaLand Ascott Trust HMN , Frasers Hospitality Trust ACV , OUE LJ3 REIT, Shangri-La Asia S07 and Hotel Properties H15 .
Travel and hospitality issuers cater to demand from a global marketplace and many of the credit issuers we track own assets and operations located outside of Singapore. However, Singapore remains a key market with demand from the Asia-Pacific region being important given Singapore’s status as a regional business and travel hub.
With REITs and companies looking to the future
The REITs and companies that were able to navigate the pandemic are no longer focused on being in survival mode but are capturing new opportunities. Last year, Singapore travel and hospitality REITs and companies were entering new business segments and geographies. Sats completed its acquisition of air cargo provider Worldwide Flight Services in April 2023, almost doubling Sats’ asset size and propelling Sats as a global player in the process.
Meanwhile, the merger of SIA’s 49% owned joint venture Vistara with Tata Group’s Air India remains on track, to create an enlarged Air India to compete on international routes to and from India and the domestic Indian market.
Among hospitality REITs and companies, CapitaLand Ascott Trust, otherwise known as CLAS, is continuing to transition its portfolio into having a larger proportion of longer-stay assets that includes student accommodation and rental housing, with an asset allocation target of 25% to 30% in the medium term.
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To help fund this transition, CLAS has been divesting hotels, including those that came with its acquisition of Ascendas Hospitality Trust in December 2019. In Singapore, OUE REIT pressed on with the rejuvenation of Mandarin Orchard, investing capital and reflagging the property into the Asia-Pacific’s largest Hilton hotel with 1,080 rooms. Shangri-La, well-known among corporate-focused travellers, launched a global brand campaign with a whimsical theme last May, as it steps up its offerings to cater to the leisure segment. The leisure segment was one of the first segments to bounce back and increasingly, travellers are combining business and leisure travel.
Looking back to the pandemic: a reflection of credit resiliency
Why was it that some travel and hospitality REITs and companies managed to emerge stronger from the pandemic while others languished? We look at some of the key differentiating factors. Within the Asia-Pacific region alone, we count at least eight major airlines that had to go through a debt restructuring, though three airlines retained (if not outright improved) their credit standing.
The key differentiating factor in our view was support from government and capital providers. For airlines based in geographies positioned as aviation hubs, governments very quickly recognised the negative impact of international border shutdowns and were intent on ensuring that these airlines could continue as going concerns.
In other words, governments saw these entities as playing a strategic role in their economies and job markets. The existence of governments and, in all three cases, capital providers who were in a fiscal position to provide financial support allowed additional funding to be channelled to these airlines, be it through direct funding (participating in fundraising efforts) or indirect funding (via extensive wage support schemes).
Secondly, travel and hospitality is a very labour-intensive industry. During the early part of the recovery phase, SIA continued with staff training and maintained a conducive employer-employee relationship with its workforce (despite retrenchments), and was able to mobilise its workforce quickly to put back capacity in the air. For the financial year ended March 31, 2023, SIA posted earnings of $2.16 billion, the highest ever in the company’s history.
A third key factor in our view is their starting capital structure pre-pandemic. Being a capital-intensive business, airlines typically borrow to fund their aircraft purchases or lease planes. For airlines that leased the bulk of their aircraft, these leases formed part of their liabilities which had to be restructured while airlines that owned their aircraft outright could still generate liquidity out of these assets.
For hospitality REITs, a key differentiating factor in our view was the sanctity of master leases and the counterparty credit risk on these master lessees. Hotels tend to cater to short stays, which is unlike other commercial real estate classes who tend to have assets leased for a longer timeframe (typically at least two years).
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With investors in Singapore seeking a stable, recurring income from commercial real estate, hospitality REITs typically have a portion of their hospitality assets leased to master lessees.
These master lessees are often related parties, such as entities owned by the sponsor, although not always the case. Master lessees bear the day-to-day fluctuation in occupancy and room rates and pay a lease payment to the asset owners that is much less variable. With revenue from underlying operations cratered, the continuity of these master lease payments was paramount as it ensured that the REITs had a source of income to repay their obligations.
Hospitality REITs that navigated the pandemic successfully had creditworthy counterparties as their lessees. Unlike the global hospitality companies which are asset-light, Singapore hospitality REITs and companies still own the bulk of their assets.
While this means that their returns to equity investors tend to be low compared to global hospitality companies which focus on asset management, these assets were valuable for credit strength. Even if revenues at that point were negligible and they had to bear the costs of operations, these companies maintained credit lines.
Well-located, high-quality hospitality assets in key gateway cities have become particularly attractive to investors shifting away from office assets with recent news reporting that four hospitality assets in Singapore are in play.
What is next for the travel and hospitality issuers?
Aside from air cargo, which can be essential, large parts of the travel and hospitality industry are in the consumer discretionary sector. A main headwind will be an economic slowdown which curbs travel and hospitality spending amidst an environment where companies have had to deal with, and continue to deal with, inflationary pressures from increases in utilities and labour costs.
As we enter a more uncertain economic environment, the previous vengeance in travelling may also give way to more budget-conscious spending behaviour. More specifically for the Singapore market, new supply is also ticking up, which points towards an exciting time for hotel guests but increases market competition for existing hoteliers. Singapore Tourism Board numbers show that occupancy for December 2023 was at only 75% against 78% the year before and 83% in December 2019 before the pandemic.
Ezien Hoo, Andrew Wong, Wong Hong Wei and Chin Meng Tee are credit research analysts with OCBC’s global markets research team
