Hospitality REITs – OCBC

Riding on earnings recovery

Growth projected for tourist arrivals. The Singapore Tourism Board (STB) is projecting 11.5m to 12.5m visitor arrivals to Singapore in 2010, up 18.6% to 28.9% from the 9.7m visitors in 2009. It also projects S$17.5b to S$18.5b in tourism receipts this year – up a whopping 40% to 49% from S$12.4b in receipts last year. Catalysts include the opening of the two Integrated Resorts (IRs), the 2010 Youth Olympic Games, and the recovery in the global economy. The STB has a 2015 target of 17m visitor arrivals and S$30b in tourism receipts. 

Riding on earnings recovery. The estimates bolster the earnings recovery theme for hospitality REITs CDL-Hospitality Trusts [CDREIT, NOT RATED] and Ascott Residence Trust (ART). The two REITs saw RevPAR1 declines of roughly 28% and 14.5% respectively in FY09 on subdued individual and corporate travel expenditure. We expect hospitality players to enjoy revenue growth this year on the back of improving occupancy and a stabilization (and potential recovery) in room rates. CDREIT is a more direct beneficiary of the new developments on the local scene due to its shorter stay profile and its larger exposure to Singapore vis-à-vis ART. Both REITs should benefit, in our opinion, from the increased MICE space and the potential draw of the IRs (Las Vegas rents more convention space than any other US city). 

Earnings growth from acquisitions. CDREIT took advantage of its low leverage (19.1% as of 31 Dec 2009) and the availability of distressed opportunities to enter the Australian market through the acquisition of five hotels. The properties were acquired at a discount of up to 66% discounts to their current replacement value (including land costs). We see limited debt headroom for ART at its current leverage level (41.2% as of 31 Dec) but believe it may still be able to make accretive acquisitions through a combination of debt and equity. Its manager is also focusing on asset enhancements. 

Valuations still compelling. CDREIT and ART are up 302% and 251% from their 2009 lows. Nevertheless, we believe ART’s valuations remain attractive at 0.92x book. Depending on the trajectory of the hospitality recovery, there could be room for further upwards earnings revisions (we are currently below consensus). CDREIT and ART are trading at 6% and 6.4% FY10F yields respectively (based on consensus for CDREIT). We do not have a rating on CDREIT. Maintain BUY with S$1.38 fair value for ART, one of our top picks for the S-REIT sector.