Category: FE-HTrust
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].
Hospitality REITs – OCBC
POTENTIAL OVERSUPPLY SITUATION
- RevPAR growth strongest for IRs
- Uninspiring results expected for 1Q13
- GPH as asset value play
Total gross lettings stagnant
While visitor arrival figures for 1Q12 to 3Q12 demonstrated declining rates of YoY growth (+14.7%, +8.3%, +3.1% respectively), 4Q12 staged a rebound with visitor arrivals up 11.0% at 3.7m (preliminary figures). 2012 visitor arrivals totaled 14.4m, up 9.1% and near the high end of STB’s 13.5m-14.5m target. However, the total gross lettings for hotels was stagnant at 10.7m room nights. It is likely that the average length of stay has declined further from the 3.73 days in 2011, e.g. down to 3.45 days, and larger proportions of tourists may be staying in non-hotel accommodations.
IR hotels benefitting the most
2012 average occupancy was flat at 86%, and average room rates rose 5.7% to S$261.2, hence RevPAR for 2012 grew 5.7% to S$225.6. We believe that the industry RevPAR numbers might be skewed by the performance of IR hotels. For 4Q12, Marina Bay Sands registered 10.0% YoY growth in RevPAR to US$362, and Genting Singapore’s RevPAR jumped 42% YoY to S$407 (Genting opened the high-end Equarius Hotel and Spa Villas in 2012). 4Q12 RevPAR for CDLHT’s Singapore hotels was flat YoY at S$205. For FEHT’s Singapore hotels, RevPAR for 27 Aug – 31 Dec 2012 was S$171, only 1.2% higher than 2011 RevPAR of S$169.
Not a pretty picture
We understand from talking to industry players that 1Q13 operational figures for Singapore hotels are likely to be lackluster. For 2013-2015, we forecast hotel room demand growth of 5.4% p.a., lower than the projected 5.8% p.a. increase in room supply.
Maintain NEUTRAL
We remain NEUTRAL on the hospitality sector. Our top pick is Global Premium Hotels [BUY, FV: S$0.33], which we believe is a longerterm asset value play. GPH is currently trading 32% below its NAV of S$0.39. We have HOLD ratings on Ascott Residence Trust [FV: S$1.36], CDL Hospitality Trusts [FV: S$1.93], Far East Hospitality Trust [FV: S$1.05] and Genting Singapore [FV: S$1.52].
FE-HTrust – OCBC
RESULTS IN LINE FOR 1 AUG-31 DEC 2012
- Results as expected
- Upscale hotels facing a squeeze
- Maintain HOLD
First results since IPO
Far East Hospitality Trust (FEHT) reported its first results since listing (for the financial period 1 Aug-31 Dec 2012) that were generally in line with our expectations. While gross revenue, at S$42.2m, was 0.7% lower than the pro-rated forecast in the prospectus, 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 its income available for distribution 4.5% above its forecast to S$33.6m.
Weak serviced residence revenue
Gross revenue from hotels was 0.6% higher than forecast at S$33.9m; stronger rental income from commercial spaces and an increase in the meetings and banquet business (e.g. at Changi Village) helped to make up for RevPAR of S$171 being 1.7% lower than forecast. Gross revenue from serviced residences (SRs) was 5.7% less than forecast at S$8.3m due to corporate cutbacks in 2H12. Corporate accounts that were lost during the previous AEI were not satisfactorily replaced. The SRs are trying to diversify away from banking/financials sector clients and are looking more at other services and oil and gas. Valuation of the portfolio increased by 0.9% to S$2.16b.
Mid-tier hotels fairing better
Among FEHT’s properties, the upscale hotels such as Quincy are facing more pressure than the mid-tier hotels. An industry contact explained that 4-star hotels are being squeezed by 5-star hotels, which have been lowering rates. We understand that if FEHT buys the Rendezvous Hotel (298 rooms) from Straits Trading, the purchase is likely to take place around end 2Q13. Negotiations and due diligence are still ongoing and there is no assurance that the transaction will proceed.
Maintain HOLD
We update our assumptions for Oasia’s future RevPAR to levels closer in line with its peer hotels, and raise our fair value from S$1.02 to S$1.05. However, we maintain our HOLD rating on FEHT on valuation grounds.
SREITs – DBSV
Refocusing on growth
• S-REIT valuations fair but ample liquidity should sustain interest
• Acquisitions a likely theme for 2013; up to S$5.7bn in assets could be purchased
• Focus on S-REITs with acquisition drivers. Picks are MCT, MLT and FEHT
S-REIT valuations fair and not compelling, however abundant liquidity should sustain interest in the sector. After a year of yield-compression led outperformance in share prices, the S-REITs sector now trades at a weighted average FY13F yield of 5.8% and a P/BV of 1.13x. While we believe the S-REITs are fairly valued at these levels, interest in the sector is likely to remain firm. This is because of the strong S$, a sustained low interest rate environment, and sector yields supported by yield spreads of 450bps above long bonds, which are still fairly decent. This could mean that capital allocations within the S-REITs sector are likely to remain high.
Acquisitions a likely key theme in 2013; potential S$5.7bn of assets might be on offer. To combat inflationary pressures which are expected to remain high in 2013, we believe investors are likely to turn from being “yield-hungry” to “growth-focused”. With organic growth prospects looking modest and most S-REITs trading above their respective NAVs, we believe that acquisitions will be a key theme in 2013. We prefer S-REITs with the ability to make accretive acquisitions (adjusted for leverage ratios remaining stable) and see possibilities coming from the sponsored REITs given their visible pipelines and REITs with regional mandates. Based on announced and potential pipelines, assuming all potentials are executed upon, we could see up to a total of S$5.7bn of asset transactions in 2013.
Our key calls. We advocate a selective stance in the SREITs with a preference towards those offering superior total returns compared to peers with potential acquisitions as an added upside to forecasts. Our picks are MCT, MLT and FEHT.
Potential downside risks.
Heightened risks to occupancy rates (which we believe to be minimal at this juncture); lower-than-expected rental reversions, earlier than expected interest rate hikes (base case early 2015).
Hospitality – OCBC
Muted outlook for 1H13
- More stores to come
- Price competition won’t return
- Fair value raised; maintain BUY
Cautious about 1H13
We note that after an outstanding 1Q12, with RevPAR and visitor arrivals growing YoY by 14% and 14.7%, respectively, growth in RevPAR and visitor arrivals decelerated through 2Q12 and 3Q12. Our channel check indicates that hotel bookings up to Chinese New Year in 2013 are still weak, with limited visibility beyond that. We note that 2013, an odd-numbered year, will likely see fewer MICE events, as biennial events are generally held in even-numbered years. Hoteliers have also expressed concern over the upcoming competition that will result from the growth in hotel room supply; new hotels typically provide substantial room rate discounts in the first few months of operation. With no immediate catalysts in sight, and an uncertain global economic environment, we see a muted outlook for tourism in 1H13.
Continued growth expected over 2012-2014
For 2012-2014, we forecast that hotel demand will grow at 6.4% p.a., outstripping the projected 4.8% p.a. increase in room supply. Supporting the positive longer-term outlook, the top four places of origin for Singapore’s visitor arrivals are projected to have real GDP growth rates of at least 4.8% in 2013 (Indonesia +6.3%, China +8.1%, Malaysia +4.8% and India +6.6% for FY ending Mar 2014).
Supply situation is manageable, and better for high-end hotels
Breaking down the projected growth in hotel room supply for 2012-2014, we note that the lower the tier, the higher the expected supply growth: Luxury (+1.6% p.a.), Upscale (+3.4% p.a.), Mid-tier (+7.0% p.a.) and Economy (+7.2% p.a.). For the first 10 months of 2012, higher hotel tiers showed stronger YoY growth in Average Room Rate (ARR) and RevPAR than lower tiers. We think that this is attributable to the more favourable supply and demand dynamics for the Luxury and Upscale tiers. The number of affluent visitors to Singapore is increasing with the general growth in arrivals, and supply is more stable for the higher-end hotel tiers.
Downgrade to NEUTRAL
We are downgrading the hospitality sector from Overweight to NEUTRAL. Our top pick is Ascott Residence Trust [BUY, FV:S$1.37], due its favourable exposure to the global growth regions of the serviced residence industry – Europe and developing Asia. We also have a BUY rating on Global Premium Hotels [BUY, FV: S$0.29], and HOLD ratings on CDL Hospitality Trusts [HOLD, FV: S$1.91], Far East Hospitality Trust [HOLD, FV: S$1.02] and Genting Singapore [HOLD, FV: S$1.33].