Weathering The Omicron Variant Wave; Reopening To Resume In 2H22

Singapore’s border and existing VTLs have been kept open despite the government halving capacity for VTLs by air and land starting 21 Jan 22. CDREIT benefits from stable contributions from Grand Millennium Auckland, which serves as a managed isolation facility. We anticipate a rapid recovery from Hilton Cambridge City Centre and The Lowry Hotel in the UK after they weather the Omicron variant wave in 1Q22. Upgrade to BUY with target price at S$1.42.

Contribution from W Hotel boosted by staycation demand. W Hotel benefits from buoyant staycation demand as Sentosa Island provides Singaporeans with the closest semblance to an overseas holiday. W Hotel is a popular destination for staycations due to its expansive view of the marina and seafront. We estimate that W Hotel’s RevPAR has rebounded 28% qoq to S$221 in 3Q21. We expect further upside with RevPAR increasing 27% qoq to S$280 in 4Q21, driven by staycation demand.

Bumpy transition on the path towards reopening. CDREIT has five hotels under government contracts to serve as dedicated isolation facilities. Self-isolation and recovery at home has become the default arrangement, including those infected with the Omicron variant and their close contacts. Thus, the government might terminate the contracts for some of the dedicated isolation facilities. The affected hotels have to switch to serving transient corporate and leisure travellers and staycation demand. Nevertheless, there is downside protection as the five hotels are under master leases, which provide minimum fixed rents totalling S$31.4m per year (80% of revenue from the five hotels in 2020).

New Zealand: Staying the course to reopen international borders. New Zealand’s government has changed its approach from zero-tolerance to a suppression strategy to live with COVID-19 as an endemic. The lockdown in Auckland ended on 3 Dec 21. Fully vaccinated New Zealanders are able to visit cafes, bars, restaurants and gyms but have to observe social distancing. The quarantine-free return of New Zealand citizens staying in Australia was, however, delayed from 17 January to end-February. Fully vaccinated international travellers would be able to visit New Zealand starting 30 Apr 22 but they have
to serve a mandatory 7-day home isolation period.

Grand Millennium Auckland has served as a managed isolation facility since 2Q20. The government contract is expected to continue into 1Q22. The hotel, which is the largest in Auckland and centrally located within the CBD and in close proximity to Auckland Conventions, contributed a sizeable 29.6% of NPI in 3Q21.

The UK: Anticipating a rapid recovery after weathering the Omicron variant wave. The UK has reopened its international borders by welcoming fully-vaccinated travellers from the US and EU member states without quarantine since 2 Aug 21. Unfortunately, the country was hit by a tidal wave of Omicron variant infections, which overtook Delta as the dominant coronavirus variant in mid-December. The British government has ramped up its booster programme. While new cases have skyrocketed, deaths have trended lower. Studies in England and Scotland have also indicated that incidence of hospitalisation is much lower for the Omicron variant vs the previous Delta variant.