Hospitality REITs – DMG

More investment options in tourism space

Historically, the de facto proxy for the hospitality sector has been CDL Hospitality Trusts due to its liquidity and size. With the proliferation in recent hospitality REITs listings, investors will have more choices to play the tourism theme going forward. Ascendas Land recently listed its maiden hospitality trust comprising 10 hotels in Australia, China and Japan in a S$385m listing, offering 437.3m units at S$0.88 each. Meanwhile, Far East Hospitality Trust (Far East HT) is offering 706m units at S$0.93 each to raise S$656m, which will have an initial portfolio comprising seven hotels and four serviced residences worth S$2.1b. These REITs derive the majority of their asset values and income from Singapore and Australia, two markets with favourable demand-supply outlook, with rising tourist arrivals that should drive up room rates and occupancies further.

Buoyant outlook for Singapore hospitality space. CDL HT and Far East HT are both leveraged to the Singapore tourism market, deriving over 80% of revenue from Singapore. Both trusts should continue to benefit from the rising tourist arrivals to the city state, which reached a historical high of 13.2m arrivals last year and is poised to attract 14-15m visitors this year. A host of new attractions, together with the integrated resorts and a growing MICE market should ensure that room demand continues to lead supply, driving high occupancies and room rates. The Singapore Tourism Board (STB) expects tourist arrivals to reach 17m by 2015 (representing 6.9% CAGR during FY11-FY15).

Outlook for Australia hospitality underpinned by favourable demand-supply dynamics. In Australia, the market is equally buoyant, driven by a resilient domestic corporate travel market and rising tourist arrivals from Asian markets such as Japan and China. Due to high replacement costs, new supply in the country is limited and has helped to keep occupancies in gateway cities above 80%. The above trends are favourable for Ascendas HT, which have seven hotels in Australia accounting for 70% of its assets.

Our key picks: CDL HT and Far East HT. The forward yield for Ascendas HT is the highest among the three at 8.0%. Concurrently, CDL HT is trading at FY13F yield of 6.5% while Far East HT trades at 6.3% yield. Yields aside, we believe other important factors to consider include cost of funding, track record of the sponsor, growth of the underlying markets and attributes of the underlying properties. In this regard, we consider CDL HT and Far East HT as having superior risk-adjusted returns. Currently, we have BUY recommendation for CDL HT (BUY, TP S$2.20), a positive view on Far East HT and a neutral view on Ascendas HT.