Hospitality REITs – OCBC

CHALLENGING INDUSTRY ENVIRONMENT

• Uninspiring 4Q12s
  
• Serviced Residences’ rates may drop
  
• Maintain NEUTRAL
  

Recap of 4Q12s

For 4Q12, CDLHT performed in line with ours and the street’s expectations. RevPAR for its Singapore hotels was flat YoY at S$205, leading NPI to stay roughly constant at S$35.6m (+0.2%). ART performed slightly lower than our expectations but higher than the street’s. 4Q12 NPI fell by 3.7% YoY to S$38.5m. FEHT’s operational results for the period 27 Aug-31 Dec 2012 was not impressive, with its Singapore hotels registering RevPAR of S$171, missing its IPO prospectus forecast of S$174. Net property income of S$38.8m was 0.2% higher than the forecast as a result of lower operating expenses. Active management of finance costs and other trust expenses helped to lift FEHT’s DPU 4.5% above its forecast to 2.09 Scents.

Challenging environment

We have learnt that players in the local serviced residence industry believe that demand for 2013 will remain flat, with rates staying flat or declining. This corroborates our view that 1H13 is challenging for the Singapore hospitality industry. For 2013-2015, we forecast that hotel room supply will grow 5.8% p.a., faster than hotel room demand growth of 5.4% p.a. We believe that the average length of stay per visitor is declining, at least partially due to the strong SGD, and this means fewer hotel room nights. Singapore is facing a potential oversupply situation for its local lodging industry over the medium-term.

Acquisitions in FY13

CDLHT completed the acquisition of Angsana Velavaru (Maldives) on 31 Jan and now the attention is on FEHT, which may buy the 298-room Rendezvous Hotel from Straits Trading around end 2Q13. An acquisition could serve as a positive price catalyst.

Maintain NEUTRAL

Based on the above and with no near term catalysts for improvement in RevPAR, we expect the industry to face continuous challenges to sustain margin with a tight labour work force and high operating costs. As such, we maintain our NEUTRAL rating on the Hospitality REITs. We have HOLDs on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$2.11] and Far East Hospitality Trust [FV: S$1.05].