Friday, 29 August 2014

Hotel Reits

WE expect hotel revenue per available room (RevPAR) to gain ground in H2,14 on the back of i) lower supply of new hotel rooms than previously forecast, ii) the recent opening of the Singapore Sports Hub, and iii) stabilisation of the rupiah.
We think hotel Reits are becoming attractive as fundamentals strengthen. Our top pick is OUE Hospitality Trust (TP: S$0.96).
Stronger H2 expected
Although visitor numbers to Singapore have been weak during the first half of the year (-2.8 per cent y-o-y), this can mainly be attributed to the lower Chinese visitor arrivals (-29.8 per cent y-o-y for H1,14). However, we note that Chinese spending rose one per cent in Q1,14 when corresponding arrivals dropped 14 per cent.
Moving into H2, we believe the sector should perform better as the Indonesian rupiah stabilises with the completion of the presidential election. Our expectations are further reaffirmed by Reit managers' recent guidance for stronger occupancy in July and more corporate bookings and activities in August.
In addition, our sensitivity study on tourism arrivals (based on data since 2004) pointed that even if Chinese visitor arrivals do not rebound in H2, visitor arrivals in H2,14 should still grow by about 2.8 per cent versus H1,14.
This, coupled with the recent opening of the Singapore Sports Hub and lower supply of new hotel rooms (1,622 versus previous forecast of 3,234) in FY14 bodes well for a recovery in the hotel space here.
Valuations still attractive
Meanwhile, the sector's valuations have fallen to dividend yields of 7.1 per cent for FY14 and 7.3 per cent for FY15 and 1.0 times P/BV versus CDL Hospitality Trusts' trading range of 5-6 per cent yield and 1.4 times P/BV in 2010/11.
CDL-HT is currently trading at a yield spread of 5.1 per cent versus its historical average of 3.6 per cent. Should RevPAR stabilise, getting back to the average is not far-fetched.
Risks are on demand
The risk in taking a bullish view is that if visitor arrivals remain weaker than expected, the sector's RevPAR could encounter another speed bump and valuations may fall back to the current lower bands.
CDL Hospitality Trusts: CDL-HT is expected to benefit from a recovery in corporate spending as the global economy recovers. Additional contributions from the Maldives are also expected in 2014.
Far East Hospitality Trust: FY14 RevPAR is expected to be flat as potential upside from sturdier corporate spending is likely to be offset by strong competition, the result of a high supply of hotel rooms. FEHT is trading in line with the sector average, offering 6.8 per cent FY14-15 dividend yields at 1.0 times P/BV.
OUE Hospitality Trusts: OUE-HT is our top pick among the hospitality Reits on the back of its stable outlook, high proportion of income secured under fixed rates and room for RevPAR growth from AEI at MOS.

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