SINGAPORE (Aug 5): On July 30, CDL Hospitality Trusts, Far East Hospitality Trust, Ascott Residence Trust and ARA US Hospitality Trust released their 2QFY2019 results before the market opened. Performance was varied (see Table 1), with CDLHT’s distribution per stapled security (DPS) for 2QFY2019 falling 3.3% y-o-y to 2.07 cents, and FEHT’s DPS for the same period declining 9.9% y-o-y to 0.91 cents. All four have difference focuses. CDLHT has more than 60% of its portfolio in Singapore, while FEHT is a pure Singapore play and ARA US Hospitality Trust is a pure US play. ART is a global real estate investment trust (REIT) with a presence in 14 countries.
According to CDLHT, 2QFY2019 revenue dropped 0.5% y-o-y to $47.5 million. Net property income (NPI) was up marginally, but finance expenses rose. Distributable income fell 7.1% y-o-y to $21 million for the quarter, but owing to higher capital distribution, total distributable amount dropped just 2.6% y-o-y to $25.1 million. This led to the drop in DPS.
CDLHT owns 16 hotels and two resorts comprising a total of 5,088 rooms as well as a retail mall valued at $2.8 billion. Of this, 62.5% (by value) is in Singapore, followed by 16.2% in Europe, 13% in Australia and New Zealand, and the remainder in the Maldives.
Operationally, CDLHT’s NPI was affected by the drop in Singapore and Maldives contribution, mainly owing to extensive room asset enhancement initiative (AEI) works at Orchard Hotel in Singapore and the closure of Raffles Maldives Meradhoo for renovation.
Orchard Hotel’s AEI — which covers its lobby, F&B outlets, all meetings spaces and the Orchard Wing — is mostly completed. As at June, all 260 rooms in the Orchard Wing have been refurbished and the remaining 65 Club Floor rooms are slated to be completed in 3QCY2019. CDLHT has said it is evaluating AEI opportunities in its other Singapore hotels: Grand Copthorne Waterfront, M Hotel, Copthorne King’s Hotel, Novotel Singapore Clarke Quay and Studio M Hotel.
CDLHT said its poorer performance was partly due to the local economy. Apart from the more transitionary renovation works affecting the performance of the Singapore hotels, there was also softer overall demand, owing to economic uncertainty and regional elections, and the absence of the biennial Food&Hotel Asia event, CDLHT’s manager says.
“CDLHT is undergoing a transition period due to major AEIs, which have impacted our overall results for this quarter,” says Vincent Yeo, CEO of CDLHT’s manager. “The macroeconomic environment, which has weakened due to ongoing trade conflicts, may continue to weigh on demand in the near term.” However, Yeo points out that benign hotel supply growth in the next few years (see Table 2) will provide “a constructive environment for a recovery in the Singapore hotel sector”.
FEHT — which owns nine hotels valued at $2 billion and five serviced residences valued at $538 million — also had a disappointing second quarter. FEHT’s hotel revenue per available room (RevPAR) dropped 4.5% y-o-y to $156 on the back of a 2.6% reduction in average daily rate (ADR) and a 1.7 percentage point drop in average occupancy for the quarter. The decline was attributed to the absence of major events during the quarter and softness in corporate demand.
“The hospitality operating environment in Singapore experienced softness in corporate demand as ongoing macroeconomic uncertainties weighed on business travel. Additionally, there was an absence of large-scale events in 2QFY2019 as compared to the same period last year, a factor which had led to [the] relatively weaker performance of the hotel portfolio,” says Gerald Lee, CEO of FEHT’s manager, in a statement. FEHT’s 1HFY2019 DPS fell 6.7% y-o-y to 1.82 cents.
The outlook could improve in the later part of the year. Visitor arrivals are forecast to grow 1% to 4% in 2019, according to the Singapore Tourism Board on Feb 13 this year. Hotel room supply is likely to rise by a sedate 1.9%, or 1,275 new rooms. “The expected slower pace of increase in hotel room supply over the next few years will help support the recovery in the Singapore hotel sector. Looking ahead, the serviced residence market also shows signs of turning around,” FEHT’s manager says.
FEHT has a 30% stake in three hotels in Sentosa: Village Hotel Sentosa, The Outpost Hotel and The Barracks Hotel. Village Hotel and The Outpost Hotel opened in April; The Barracks Hotel will open in 2HCY2019. However, the three properties are expected to stabilise only next year. In total, FEHT’s acquisition pipeline comprises seven properties, totalling 1,168 hotel rooms and 599 serviced residence units, under a right of first refusal with its sponsor Far East Organization.
OCBC Investment Research has a “hold” rating on both CDLHT and FEHT. FEHT’s investment proposition is straightforward. If, as expected, the Singapore dollar moves towards the lower range of the SGD Nominal Effective Exchange Rate policy band in October, the Singapore economy will become more competitive.
While a weaker Singapore dollar will boost exports — manufacturing is the largest component of GDP and trade accounts for 300% of GDP — it will also make Singapore a more attractive destination for visitors from a cost perspective. Hospitality trusts with a large Singapore component — such as FEHT and, to a lesser extent, CDLHT — will benefit. CDLHT’s NPI could be supported by the 260 renovated rooms at Orchard Hotel.
As an observation, FEHT is trading at a price-to-book ratio of 0.8 times and nearer its five-year mean; distribution yield is 6.1%. While REITs are somewhat overvalued at this point of the cycle, there are pockets of value to be found.
