Things seem to be looking up for hospitality Singapore REITs (S-REITs) as Singapore is gradually opening up its borders to international tourists.
On Feb 17, Singapore announced that it would re-open its borders from Feb 25. It would also resume all vaccinated travel lanes (VTLs) then, ahead of market expectations.
On March 24, Prime Minister Lee Hsien Loong further announced that Singapore will be “drastically” streamlining its testing and quarantine requirements for travellers.
“This simplified vaccinated travel framework will let Singaporeans travel abroad more easily – almost like before Covid-19,” said the PM in his speech.
The lifting of most restrictions for fully vaccinated visitors entering Singapore “will give a much-needed boost to businesses, particularly the tourism sector and help Singapore reclaim its position as a business and aviation hub,” he adds.
The Ministry of Trade and Industry (MTI) also announced the re-opening of land borders between Singapore and Malaysia on the same day as the PM's speech.
Following the news, DBS Group Research analysts Geraldine Wong and Derek Tan are positive on the hospitality S-REIT sub-sector as recent data points suggest that the sub-sector is at the beginning of a “convincing multi-year upcycle”.
“The hotel S-REITs first saw bright spots in 4QFY2021 with revenues per average room (RevPAR) at a two-year high and we see them building on this momentum to deliver upside surprises through FY2022-2023,” write the analysts in their March 25 report.
“Domestic travel markets are now ahead on the recovery track, with 4QFY2021 RevPAR at [around] 62% of normalised levels, ahead of Singapore’s [estimated] 47%,” they add.
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With this, Wong and Tan now see the reopening theme coming to Asia as key Asian markets have reopened or are committing to reopen their borders in 1H2022.
“Similarly, Singapore should reopen to 65%-70% of its key visitor source markets by mid-2022 and potentially reach 90%-95% if Greater China eases border controls. The stars are aligning for our hotel S-REITs with Asia as the single largest revenue market with exposure ranging from 42% to 100%,” they continue.
At their current share prices, the hospitality S-REIT sub-sector is trading at 0.8x P/NAV or -1 standard deviation. As such, DBS’s Wong and Tan see an opportunity for further upside given close correlation between RevPAR and stock prices. The analysts thus estimate the sub-sector to trade at a P/NAV multiple of at least 0.9x.
In addition, the analysts say they see more potential upside as capital values are revalued up from currently 96% of normalized levels in 2019.
“P/NAV multiple on [a] normalised book value of 0.78x will translate to a performance upside of c.15% to mean, or [around] 28% to +1 standard deviation levels, and on a compelling forward FY2022 sector yield of 6.1%,” they write.
In their report, Wong and Tan have identified Ascott Residence Trust (ART), CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) as their top picks within the sub-sector. ART and CDLHT are expected to benefit from both domestic and international recovery, while FEHT was selected for its exposure to Singapore tourism recovery.
They have given “buy” calls to all four hospitality S-REITs under their coverage, with target prices of $1.30, $1.40, 78 cents and 65 cents for ART, CDLHT, FEHT and Frasers Hospitality Trust (FHT) respectively.
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In a separate report on Singapore retail and hospitality, DBS’s Wong and Tan say they estimate a higher mix of foreigners tapping into the newly relaxed vaccinated travel framework going forward.
“Given that we are just one month into the return of VTL, which were re-started on Feb 25, 2022, passenger traffic has reached good traction, back to 18.2% of pre-Covid levels last week, or a level that is more than four-fold the monthly traffic for February prior to the start of VTL,” the analysts write.
“The exponential increase in arrivals is a positive surprise amidst pent up demand for travel. The timely announcement of the new vaccinated travel framework framework alongside the relaxation of Asian borders help put Singapore in the forefront in a bid to capture tourist demand as neighbouring countries such as Indonesia have also substantially relaxed border entry requirements for foreigners,” they add.
The soft target of 50% of passenger volumes for FY2022 will allow hoteliers to ramp up demand for room in time, with tourism and hospitality at a standstill for the past two years, they note.
“Alongside the return of conferences, large events, and, potentially, the nightlife scene in Singapore in the coming few weeks, key leisure and corporate demand flows will take shape in the coming months to sustain the exponential momentum in tourist arrivals in March,” the analysts say.
“We expect the pipeline of MICE [or meetings, incentives, conferences and exhibitions] events to see greater certainty for the rest of the year, including the much-anticipated Formula 1 Grand Prix in October,” they continue.
On the retail sector, Wong and Tan estimate that food and beverage (F&B) operators are likely to see a surge of large bookings in the coming weeks or months, as families, friends, as well as corporate groups conduct their long-awaited gatherings.
“The return to office trend, alongside further relaxation within the F&B space, will help build up transient traffic flow at retail malls, which has now generally hovered around 60% of normalised levels,” the analysts say.
“The return of tourists will also be the long-awaited boost for our central landlords, as Singapore now expects passenger traffic to return to 50% for the full year, with a good proportion of deep-pocketed leisure travellers, who are ready to open their wallets along Orchard Road.”
UOB Kay Hian analyst Jonathan Koh has maintained his “overweight” recommendation on the hospitality S-REITs sub-sector as Singapore resumes the reopening of its borders.
“Hospitality REITs will benefit from pent-up demand for travel, the earlier-than-anticipated restoration of VTL quota and the resumption of reopening. We expect resumption of reopening with expansion of capacity for existing VTLs and introduction of new VTLs by 2Q2022,” he says in his March 25 report.
Like his counterparts at DBS, Koh has also chosen ART, CDLHT and FEHT as his top picks.
In his report, Koh sees ART benefitting from the pent-up demand for travel. ART has also seen six straight quarters of recovery, with its revenue per average unit (RevPAU) maintaining an upward trajectory.
Koh is also upbeat on ART’s value creation through the recycling of its assets.
“ART divested six properties at an average exit yield of 2% and total proceeds of $580 million. The capital freed up was reinvested in 11 yield-accretive rental housing and student accommodation properties for total consideration of $780 million and an average EBITDA yield of 5%,” Koh writes.
“ART’s longer-stay assets currently account for 16% of assets under management (AUM). Occupancy for its student accommodation properties was close to 100%.”
With CDLHT, Koh sees green shoots of recovery both locally and abroad. The trust’s hotels in Singapore are also currently benefit from staycations and VTLs.
During the 4QFY2021 ended December, CDLHT’s RevPAR for its six Singapore hotels rebounded 20% y-o-y and 41% q-o-q to $107. RevPAR for W Hotel increased 12% y-o-y to $348.
The trust is also seeing recovery in its properties in the UK, Maldives and Japan. RevPAR for the UK eased 7% q-o-q to £109 ($195.15) in 4QFY2021 due to the emergence of the Omicron variant in Dec 2021. Meanwhile, RevPAR for CDLHT’s Maldives properties tripled y-o-y to $410 in 4QFY2021 after it reopened its borders on July 15, 2021.
CDLHT’s RevPAR for Japan improved 9% q-o-q due to a recovery in domestic demand after the state of emergency was lifted in early October 2021. Grand Millennium Auckland in New Zealand continued to serve as a managed isolation facility.
Finally, Koh sees FEHT as a pure play on Singapore’s hospitality sector. During the 2HFY2021 ended December, the REIT reported a 10.9% y-o-y growth in distribution per unit (DPU) of 1.53 cents.
FEHT’s hotels and serviced residences have also seen recovery due to the easing of border restrictions and introduction of VTLs. FEHT’s RevPAR for hotels grew 29% q-o-q to $67 in 4QFY2021, while RevPAR for serviced residences grow 24% q-o-q to $158.
FEHT is also deleveraged and well-positioned for future expansion, notes Koh.
The REIT, in December 2021, had entered into a put-and-call option agreement to divest Central Square for $313.2 million, which represents an attractive exit yield of 1.8%, adds the analyst.
The way Koh sees it, sector catalysts include the expansion of capacity for existing VTLs and the introduction of new VTLs by 2Q2022.
“[The] current share prices for hospitality REITs represent an average discount of 19% to NAV. P/NAV is 0.88x for ART, 0.92x for CDLHT and 0.72x for FEHT,” he writes.
On the flip side, a new Covid-19 variant could become a downside risk for the sub-sector. A recovery that is centred on developed countries while developing countries are still struggling to cope with the Covid-19 pandemic is another downside risk.
Koh has given “buy” calls for ART, CDLHT and FEHT with target prices of $1.29, $1.45 and 76 cents respectively.
Units in ART, CDLHT, FEHT closed $1.12, $1.29 and 65 cents respectively, while units in FHT closed at 49 cents on March 25.
