Singapore Hospitality: Buy ahead of a spectacular quarter
- Channel checks indicate that hoteliers are expected to deliver better than expected 3Q22 results
- Room rates have leaped past pre-COVID levels, fueled by strong MICE line-up in 2H22 and longer average length of stay which has almost doubled from 2019 level
- Hospitality S-REITs’ share prices have flat-lined in recent months but look set to re-rate further
- Our top picks are CDLHT and ART
Robust travel demand and strong earnings to drive share price re-rating. With Formula One (F1) around the corner and a robust line-up of MICE events until the end of 2022, we believe that 2H22 will turn out to be a spectacular half for the hospitality industry. In our channel checks, we believe that hospitality S-REITs are likely to report strong RevPAR growth with potential for upside surprises come 3Q22 results/operational updates in its key market – Singapore (c.40% of assets) – as the biggest driver. We maintain our top sector picks Ascott Residence (ART) Trust and CDL Hospitality Trusts (CDLHT) with TPs of S$1.40 and S$1.55, respectively. Our TPs are the highest on the street, pegged to target P/NAV multiples of 1.18x, which is within the +0.5 to +1.0 standard deviation (SD) range.
Room rates have hiked past pre-COVID levels; strong MICE line-up to drive demand. We observed that average daily rates (ADRs) for the sector have sped past 2019 levels since 2Q22 with the spread continuing to widen in 3Q22. Our channel checks indicate that most hotels are seeing higher ADRs on the back of rising occupancy rates as rooms (from downtime) are added back to overall stock. The F1 weekend looks robust with selected 4-star to 5-star hotels charging S$1,000 – S$2,500/night for that weekend and a majority of hotels are already “fully booked”. Thereafter, while rates are expected to cool sequentially, we note that hoteliers appear to be maintaining rates at close to or higher than pre-COVID levels. A robust pipeline of 66 MICE events scheduled for 2H22 after next weekend’s F1 will continue to drive corporate demand and ‘bleisure’ demand, which we note has led to close to a doubling in average length of stay this year to 6.0 days versus c.3.4 days back in 2019.
RevPAR growth to outpace cost increases. Hospitality S-REITs’ share prices have flat-lined since Jun-Jul 2022 over concerns of the impact of an economic slowdown on distributions as well as their ability to maintain DPU growth due to higher costs. The ability for RevPAR to outpace higher operational costs and interest expense will be a key item to monitor, in our view.