Goola Warden Wed, Jun 15, 2022
As travel restrictions are lifted, analysts are becoming increasingly bullish on the outlook for hospitality trusts. DBS Group Research believes that the worst of the lockdowns are done and dusted. “The return of leisure travel has led to hoteliers’ hiking room rates. Leisure demand is poised for a meaningful upturn come 2H2022 as governments across the world ease Covid tests and quarantine requirements for vaccinated travellers,” a May DBS report points out.
For instance, RevPAR rose by 34% y-o-y in 1Q2022 in many countries, DBS observes. Its analysts believe that the uptick in Omicron cases globally that is being reported currently is unlikely to derail the recovery trajectory.
“We continue to expect more upside to RevPAR from 2Q22 onwards. The forward booking pace has improved and hoteliers are more confident in hiking room rates,” DBS says.
DBS Research says that security-holders of these hospitality trusts are getting value for money in that the valuation implies these assets are priced below replacement costs. Investment properties including hotels and lodging assets are valued based on their rental income and outlook. The pandemic and the lockdowns caused a dip in these metrics. The net asset value of CDL Hospitality Trusts (CDLHT) fell from $1.53 as at Dec 31, 2019, to $1.33 as at Dec 31, 2021, after hitting a low of $1.32 as at Dec 31, 2020.
Since the announcement of FHT’s privatisation, DBS Research has doubled down on its CDLHT recommendation based on replacement costs. “CDLHT should see positive investor interest following news of FHT’s proposal to privatise. CDLHT currently trades at an implied average price per room of $0.6 million for its Singapore hotels, which is below the replacement cost of $0.75 million per room in Singapore. CDLHT’s replacement cost per room has likely risen above $0.75 million per room implying an even deeper discount at the current stock price. CDLHT is also a prime beneficiary of Singapore’s reopening,” DBS says.
Unfortunately, CDLHT’s security-holders may also have to support the trust in the event that CDL divests its M&C hotels into CDLHT.
The DBS analysts are particularly bullish on ARA US Hospitality Trust. A word of caution though. If the US enters a recession, travel and hotel stays could be negatively impacted.
The portfolio of Ascott Residence Trust (ART) was more resilient during Covid-19. Its NAV as at end of December 2019 was $1.22 compared to its NAV of $1.17 as at end December 2021. Although ART has a lower portion of fixed rents than either CDLHT or Far East Hospitality Trust (FEHT), it owns 54 serviced residences where guests stay longer compared to hotels, 14 rental housing using properties mainly in Japan, and seven purpose-built student accommodation (PBSA). This means ART has greater income stability compared to other hospitality trusts.
“The main focus is to look for a way to reconstitute the portfolio to have more income stability. The key driver was to look into the student accommodation and rental housing as a class. In the last year, we have invested in 11 properties to expand into this longer stay accommodation,” says Beh Siew Kim, CEO of ART’s manager.
In FY2021, ART divested two properties at 5% yield. Along with three properties divested in FY2020 at yields of 2% and 3%, and with most at 50% above book value, ART reaped $580 million in proceeds including $225 million in net gains. During the same period, ART has invested $700 million in eight PBSA properties in the US at higher yields, taking long stay accommodation up to 16% of portfolio value. Beh says ART plans for the long-stay accommodation to comprise up to 30% of ART’s portfolio.
In March, FEHT divested Central Square to City Developments for $313.2 million, 70.8% above the original purchase price of $188.3 million in 2012. FEHT’s NAV had fallen from a high of 87.2 cents pre-Covid-19 to a low of 79 cents as at Dec 31, 2020. NAV has rebounded to 83.2 cents as at Dec 31, 2021.
Nonetheless, JP Morgan has a hold recommendation on FEHT. “What we disliked about FEHT was that 1Q2022 occupancy fell 8.4pts to 67.7%, due to the cessation of government contracts for isolation use in three hotels,” JP Morgan says. Despite a 15.7% rise in RevPAR in 1Q2022, improvements in room rates, and higher forecast distributions per stapled security (DPS) in FY2022 and 2023, JP Morgan has kept its hold recommendation.
FEHT is trading at the highest discount to NAV, at 0.78 times its NAV. And, as the divestment of Central Square shows, the market value of its properties could be a lot higher than its book value.
Despite DBS analysts’ bullishness, investors should be cognisant of inflationary pressures on hospitality trusts. Rising interest rates and higher costs are likely to impact distributions while the trading price is likely to come under pressure from rising risk-free rates.
