SINGAPORE (Apr 21): The Covid-19 outbreak in Singapore has significantly affected the country’s tourism industry. As such Singapore hotel REITs are trading below replacement cost, at around 0.5 to 0.6 times price-to-book ratio, at -2 standard deviation (SD) of their 10-year mean.
On an enterprise value (EV)/room basis, DBS Group Research found that all four S-REITs trade at an implied valuation/room of $0.5-1.2 million/room, with CDL Hospitality Trusts (CDLHT) and Far East Hospitality Trust (FEHT) the lowest at less than $0.6 million/room. This is even cheaper than recently transacted land costs for hotel sites in recent years.
“If hotel S-REITs continue to trade at such low valuations, we believe that their sponsors may consider taking them private given that most have not been active in raising capital and/or recycling assets,” says analyst Derek Tan.
Among the four hotel S-REITs, Tan believes that Frasers Hospitality Trust (FHT) and FEHT could be attractive privatisation candidates, as they have been the least active in tapping capital since listing.
“We estimate that it will cost the Sponsors around $450m-600 million to buy out the minorities, assuming a 25% premium to current price. While the amount may sound hefty in the current climate, this compares favourably to the $562 million paid for the hotel site in Club Street in Singapore in Jan 2019,” says Tan.
The sponsors of FHT and FEHT will then gain control of a diversified portfolio of 3,000 rooms (FEHT) and 4,000 rooms (FHT), which will return higher when operating conditions improve.
On the back of this, DBS has upgraded its call on FHT to “buy” with a lowered target price of 65 cents from 78 cents previously.
The sponsor’s 62% stake in FHT stands as the highest across the sector, with FHT a prime candidate for privatisation at current levels. The implied valuation of $910,000/room for quality assets Intercontinental Singapore and Fraser Suites Singapore trends below development costs per room, especially given the superior locations of the two assets.
“We estimate that a buyout opportunity will cost $444 million at a 25% premium to current share price to gain full control of the hotel portfolio, below book value of $523 million,” says Tan.
Meanwhile, FEHT has also been upgraded to “buy” with a lowered target price of 60 cents from 69 cents previously.
“We remain comfortable that FEHT can continue to deliver steady returns of about 6.0% at current levels, backed by the fixed rent of its master leases which we estimate to contribute some 97% of our revised FY20F revenues (around 70% on normalised levels),” says Tan.
Additionally, FEHT’s master lessees are entities and affiliates of its sponsor, Far East Organization, which is expected to provide the trust in these tough times.
As at 12.05pm, units in FHT are trading at 48 cents or 0.7 times FY20 book with a distribution yield of 3.7%; units in FEHT are trading at 48 cents or 0.6 times FY20 book with a distribution yield of 5.5%.
