After "Crazy Rich Asians", Hospitality REITs Are The Next Big Investment Opportunity - Josh Tan
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After “Crazy Rich Asians”, Hospitality REITs Are The
Next Big Investment Opportunity
You Weiren | Stocks | 30 January 2019
We remain positive on hospitality REITs despite their dismal performance in 2018.
Visitor arrivals expected to remain strong in the coming years, given the continued efforts and
investments by the STB to develop the local tourism landscape.
The expected increase in visitor arrivals also coincides with a tapering of hotel room supply over
the next few years, and that could drive a continued RevPAR recovery.
Hospitality REITs offering some of the highest distribution yields in the REIT universe, and are
expected to have the highest DPU growth in 2019.
We like Far East Hospitality Trust due to its pure-play focus on the Singapore market.
For Singapore's hospitality REIT sector, 2018 has largely been a year to forget (Figure 1). Despite its
dismal performance last year, we continue to remain positive on hospitality REITs as we expect
Singapore's tourism industry to continue its cyclical upturn heading into 2019. With the share price decline
last year also bringing valuations down to more attractive levels, we believe the time is ripe for investors
to take a closer look at hospitality REITs.
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity Figure 1: Hospitality REITs Had A Disappointing 2018 Visitor Arrivals To Remain Strong In Coming Years Singapore's hospitality sector continues to register healthy tourist arrivals, with close to 17 million visitors arriving in Singapore in the first 11 months of 2018 – that's a 6.6% increase over the same period in 2017, and not too far away from the Singapore Tourism Board's (STB) projection of about 17.6 – 18.1 million tourist arrivals in 2018. With just one more month to go, Singapore remains on track to achieve yet another record-breaking year for international visitor arrivals (Figure 2). Figure 2: Singapore Remains On Track For Another Record-Breaking Year For Tourist Arrivals P A G E| 2
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity Based on estimates by the Pacific Asia Travel Association, Asia Pacific is expected to enjoy a steady 5.5% average increase in international tourist arrivals per year over 2018 – 2023, reaching a record high of almost 900 million by 2023. Given that Singapore is the gateway to Asia and is a popular stopover destination for travellers heading further afield, Singapore is well-placed to benefit from this positive trend. Moreover, the continued efforts and investments by the STB to develop the local tourism landscape (Figures 3 and 4) is also expected to help drive visitor growth in the coming years. With the leases for Singapore's three container terminals – Tanjong Pagar, Keppel and Brani – expiring in the coming decade, the land that will be freed up will be re-developed together with Sentosa Island as part of the Greater Southern Waterfront project, a sprawling 1,000 hectare area offering an expanded set of themed destinations and experiences. The Mandai eco-tourism hub featuring five wildlife parks is also expected to attract more than 10 million visitors each year when completed in 2023. Figure 3: Recent Developments In Singapore’s Tourism Landscape P A G E| 3
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity Figure 4: Upcoming Developments In Singapore’s Tourism Landscape Singapore really had it going in 2018 – not only did it steal the international spotlight after hosting the historic Trump-Kim summit, it also served as the backdrop for Hollywood box-office hit "Crazy Rich Asians", both of which generated strong publicity for the city-state. While it may be too early to quantify the impact of these events, they have certainly placed Singapore on the map for international audiences and reinforced Singapore as an ideal destination for both leisure and business travel, all of which bodes well for the hospitality sector in the longer term. Tapering Hotel Room Supply In Coming Years The expected increase in visitor arrivals also coincides with a tapering of hotel room supply over the next few years. Based on estimates by Horwath HTL, the total hotel room supply in Singapore is expected to grow by a compounded annual growth rate (CAGR) of 1.3% over 2018 – 2020, a dramatic slowdown from the 5.1% CAGR over 2005 – 2017 (Figure 5). P A G E| 4
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
Figure 5: Hotel Room Supply To Taper In Coming
Years
A total of 1,914 hotel rooms are expected to be completed this year, with the bulk of it coming from three
hotel developments in Sentosa by Far East Hospitality (Table 1). In 2020, only 651 new hotel rooms are
expected to come on-stream. Given the improving fundamentals of Singapore's hospitality sector,
especially with tourist arrivals projected to surge in the coming years, we expect the increase in hotel room
demand to be able to absorb the limited new supply.
Table 1: Hotels That Will Be Completed In Coming Years
Name of Hotel No. of Horwath Operator Expected
Rooms Rating Opening
Swissotel The Stamford 329 Upscale/Luxury Accor Hotels 2019
Raffles Hotel 111 Upscale/Luxury Accor Hotels 2019
Dusit Thani Laguna 206 Upscale/Luxury Dusit 2019
Singapore International
The Outpost Hotel @ 193 Upscale/Luxury Far East 2019
Sentosa Hospitality
The Barracks Hotel 40 Upscale/Luxury Far East 2019
Hospitality
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30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
Capri by Fraser @ China 306 Mid-Tier Frasers 2019
Street Hospitality
Holiday Inn Express -7 Mid-Tier IHG 2019
Serangoon
Village Hotel Sentosa 606 Mid-Tier Far East 2019
Hospitality
Yotel Changi Jewel 130 Economy Yotel 2019
THE EDITION by 190 Upscale/Luxury Marriott 2020
Marriott
The Clan 292 Mid-Tier Far East 2020
Hospitality
Aqueen Hotel Geylang 100 Economy Aqueen Hotels 2020
Aqueen Hotel Lavender 69 Economy Aqueen Hotels 2020
Source: CDL Hospitality Trust, Singapore Tourism Board
With the outlook of Singapore's hospitality sector looking positive, the Urban Redevelopment Authority
(URA) has released one hotel site at Club Street, as well as one 'white' site at Marina View, as part of its
2H18 government land sales (GLS) programme. Developers have also been shifting their attention to
hotel development amidst a slower residential property market, with two en-bloc sites having obtained
permission to change their land use for hospitality. While these developments are expected to further
increase hotel room supply, they will only hit the market in 2022.
RevPAR At Inflection Point
Revenue per available room (RevPAR) – an important performance metric used in the hotel industry –
has been on a down-cycle for the past few years due to tepid tourist arrivals and supply pressures. This
has resulted in a sustained decline in the 12-month rolling average RevPAR since peaking in 2013 (Figure
6). However, we see clear signs of a hospitality sector upturn heading into 2019.
Despite a surge in hotel room supply over the past few years, the overall occupancy rate has remained
relatively stable, and has started to see an uptick since 2016 – an indication that demand has been picking
up. Concurrently, a tightening hotel room supply should also lead to improved room rates for hoteliers.
As such, we believe RevPAR should continue its rebound over the next few years.
In fact, we reckon that the multi-year RevPAR recovery has already started, with Singapore hotels
experiencing a 2.3% growth in their RevPAR (as of end-November 2018), as compared to the same period
last year. November 2018 also marked the sixth consecutive month of RevPAR growth.
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30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
Figure 6: RevPAR Has Started To Recover Since 2017
Hospitality REITs To Have Highest DPU Growth In 2019
Given the bright outlook of Singapore's hospitality sector, we believe the sell-off in hospitality REITs last
year was overdone and see current price levels as an attractive entry point for investors. The sector offers
an average distribution yield of about 6.71%, one of the highest in the Singapore REIT universe (Table
2). Moreover, the sector is currently trading at a price-to-book ratio of 0.90, which we believe is
undemanding given that it is expected to have the highest distributions per unit (DPU) growth in 2019.
Table 2: Hospitality REITs Have Highest DPU Growth In 2019
^Sector *Distribution Yield (%) *DPU Growth (%) PB Ratio
Hospitality 6.71 3.45 0.90
Industrial 6.98 3.04 1.16
Office 5.65 0.64 0.87
Retail 5.65 2.17 1.07
Healthcare 6.40 2.34 1.27
S-REITs 6.37 2.49 1.03
Source: Bloomberg, iFAST Compilations
*Based on consensus estimates for 2019 as of 28 Jan 2019
^Excludes offshore REITs
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30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
Against this backdrop, hospitality REITs that have significant exposure to the domestic hotel market will
be the main beneficiaries of Singapore's tourism recovery. As such, we prefer Far East Hospitality Trust
(SGX:Q5T) due to its pure-play focus on the Singapore market. Its distribution yield of about 6.5% and
price-to-book ratio of just 0.72 are also looking quite attractive at this moment relative to its peers (Table
3).
Table 3: Hospitality REITs Listed on SGX
REIT *Distribution Yield PB Gearing % NPI From
(%) Ratio (%) SG
Ascendas Hospitality 7.07 0.84 30.8 17
Trust
CDL Hospitality Trust 6.08 1.03 34.2 61
Far East Hospitality Trust 6.67 0.72 40.4 100
Frasers Hospitality Trust 6.90 0.93 33.6 22
OUE Hospitality Trust 7.48 0.91 38.7 100
Ascott Residence Trust 6.07 0.96 36.7 11
Average 6.59 0.90 35.7 52
Source: Bloomberg, iFAST Compilations
Data as of latest financial period
*Based on consensus estimates for 2019 as of 28 Jan 2019
Far East Hospitality Trust's (FEHT) is currently the few REITs that offer investors pure exposure to the
Singapore hospitality sector. Its property portfolio consists of 13 properties (9 hotels and 4 serviced
residences), all strategically located within close proximity to train stations, business districts, leisure
attractions, MICE facilities and healthcare facilities (Figure 7). With a continued recovery in Singapore's
hospitality sector, we believe the prospects for FEHT remain bright.
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30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity Figure 7: FEHT’s Property Portfolio Benefits From Strong Sponsor Presence FEHT benefits from the presence of a strong sponsor, the Far East Organisation group of companies, which is currently the largest private property developer in Singapore, with extensive experience and strong hospitality capabilities that FEHT can capitalise on to enhance its portfolio. Notably, the sponsor has a solid pipeline of assets, which FEHT has a first right of refusal (ROFR) to, that could potentially be injected into the REIT (Table 4). Table 4: Strong Pipeline Of ROFR Properties Name of ROFR Property Expected Completion Date No. of Rooms Orchard Scotts Residences Completed 207 Orchard Parksuites Completed 225 Village Residences West Coast Completed 51 AMOY Hotel Completed 37 Oasis Hotel Downtown Completed 314 Oasis West Residences Completed 116 *Village Hotel 2019 606 P A G E| 9
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
*The Outpost Hotel 2019 193
*The Barracks Hotel 2019 40
The Clan 2020 292
Total Hotel Rooms 1,471
Total Serviced Residence Units 599
Source: Far East Hospitality Trust
*FEHT owns a 30% stake in these developments
FEHT also has a 30% stake in three upcoming mid-tier and upscale hotel developments in Sentosa –
Village Hotel, The Outpost Hotel and The Barracks Hotel – and has the ROFR to the rest of the stake
when the hotels are completed. Given that the bulk of hotels in Sentosa cater to the luxury crowd, the
three hotels face limited competition as the mid-tier and upscale segments remain underserved, and could
benefit immensely from the Greater Southern Waterfront project in the longer-term.
Downside Risks Remain But Likely Factored Into Valuations
Singapore's hospitality sector is an exciting area to be in, but macroeconomic headwinds brought about
by the ongoing US-China trade war could weigh on tourist arrivals and RevPAR growth in 2019 despite
an improving supply outlook. As such, the performance of FEHT's hotel portfolio and its distributable
income could be adversely affected.
Furthermore, unitholders should note that FEHT is moderately exposed to interest rate risk as slightly
less than half of its borrowings are on variable rates. In a rising interest rate environment, FEHT may
incur higher debt servicing costs, putting downward pressure on distributable income.
At 40.4%, FEHT's gearing ratio is also high relative to its peers, leaving little debt headroom and any
future acquisitions could be funded by equity raising. However, we note that FEHT's Sentosa properties
are currently valued at cost basis. When completed, the properties will be valued on a completed basis,
and the resulting revaluation gains should help to bring down its gearing ratio. In any case, we believe that
the increased downside risks have already been baked into its low valuations.
The good news for investors? Each of FEHT's 13 properties is under a Master Lease Agreement (Table
5), where the master lessee, all of whom are members of the sponsor group, will pay FEHT rental
payments that comprise a fixed and variable component, ensuring that unitholders receive distributions
with a certain level of stability. The term of each Master Lease Agreement is for 20 years (from listing
date in Aug 2012) with an option to extend for another 20 years.
The fixed component provides downside protection to unitholders, while the variable component, which
is pegged to a percentage of the property's gross operating revenue (GOR) and gross operating profit
P A G E| 1030 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
(GOP), enables unitholders to participate in any potential upside from increased hotel room demand in
the future. If the variable component yields a negative value, unitholders will not be expected to bear any
operating losses as variable rent will simply be zero.
Table 5: Terms Of Master Lease Agreements
Hotel Name Fixed Fees (SGD Variable (% Variable (%
m) GOR) GOP)
Village Hotel Albert Court 3.5 33 25
Village Hotel Changi 7.5 33 24
The Elizabeth Hotel 5.5 33 24
Village Hotel Bugis 7.0 33 29
Oasia Hotel Novena 8.0 33 28
Orchard Rendezvous Hotel 10.0 33 37
The Quincy Hotel 2.5 33 23
Rendezvous Hotel & Gallery 6.5 33 25
Oasia Hotel Downtown 6.5 33 25
Village Residence Clarke Quay 3.5 33 41
Village Residence Hougang 1.5 33 38
Village Residence Robertson 2.5 33 40
Quay
Regency House 2.5 33 40
Source: Far East Hospitality Trust
Undervalued REIT With Attractive Distribution Yield
As FEHT pays regular distributions to its unitholders, the dividend discount model can be used to
estimate its intrinsic value. Assuming a discount rate of 8.0% (calculated using the capital asset pricing
model) and a constant dividend growth rate of about 2.0% (in line with long-term inflation expectations),
the simplified model yields an estimated target price of SGD 0.73 (Figure 8), which seems to suggest that
FEHT may be undervalued at its current price of SGD 0.63 (as of 28 January 2019).
P A G E| 1130 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity Figure 8: Using The Dividend Discount Model To Estimate Intrinsic Value Its price-to-book ratio of just 0.72 also appears to have priced in much of the downside risks facing the REIT, and with the cyclical upturn in Singapore's hospitality sector expected to continue, we believe it is time for investors to seriously consider stocking up on FEHT. To sweeten the deal for investors, FEHT offers an attractive distribution yield of about 6.67% this year (as of 28 January 2019). P A G E| 12
30 JAN 2019 | After “Crazy Rich Asians”, Hospitality REITs Are The Next Big Investment Opportunity
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