Hospitality S-REITs: Sun is shining again
- A summer surge in travel demand on the cards as shown by a variety of positive indicators
- Hoteliers have pricing power in their hands, expect 2022 performance to exceed pre-pandemic levels
- ARAHT and ART expected to report robust operating metrics in US come 1H22 results
- Maintain BUY on ARAHT and ART with TPs of US$0.70 and S$1.40, forward FY22 yields at 9.5% and 4.0%, respectively
A summer travel surge on the cards, as vacationers flock to holiday destinations. We are excited about the prospects of a rebound in operating metrics observed in the USA, starting from 2Q22, which is the peak travel season. We see a variety of positive indicators starting from (i) major US airlines raising guidance on higher-than-expected ticket prices and capacity yields, (ii) cruise spending now just 10% shy of full recovery, and (iii) strong forward booking trends on travel websites. These encouraging signs point towards the ability of hospitality S-REITs with US exposures (ARAHT and ART) to post strong operating metrics come 1H22 results.
Hoteliers upping prices as pricing power returns in the US. Recent forward outlook statements from major hotel groups (Marriott, Hyatt, and Hilton) are also turning more promising, with most hoteliers expecting to see a leap in RevPAR in 2Q-3Q22 on the back of robust domestic travel demand for both the leisure and corporate travel segments. With pricing power back in the hoteliers’ hands, we also note that STR and Tourism Economics recently upgraded their recovery timeline forecast for US hotel RevPAR to surpass 2019 (or pre-COVID-19) levels by 2022, which is a positive read for ARAHT (100% exposure to the US market) and ART (20% exposure to the US market). We note that these revisions are inflation-adjusted, implying that the pent-up demand for travel will likely be sustained, despite high inflation rates in the USA.
Close correlation between RevPAR and share price not fully reflected in valuations. With RevPAR-led recovery underway with further strength boosting upside potential, we remain confident that a re-rating in share prices for ARAHT and ART can be sustained. Trading at 0.7x P/NAV (ARAHT) and 1.0x P/NAV (ART) and offering FY22F yields ranging from 6%-9%, we remain attracted to remain vested in the multi-year growth story that the hospitality sector offers.