SINGAPORE (Mar 5): Visitor arrivals and tourist receipts rebounded last year. Which, if any, of the hotel real estate investment trusts (REITs) could benefit?
First, the data: On Feb 12, the Singapore Tourism Board announced visitor arrivals rose 6.2% to 17.4 million, and tourism receipts rose 3.9% to $26.8 billion. Tourism receipts for accommodation increased 2% to $4.6 million, and shopping spend rose 9% to $4.7 million. Occupancy rates averaged 84.7%, up 1.5 percentage points y-o-y. Revenue per available room (revpar) fell $2, however, to $183. Room supply rose 5% to 67,084. STB did not announce the average length of stay.
For this year, STB forecasts a growth in visitor arrivals of 1% to 4%, to 17.6 million to 18.1 million, and tourism receipts to grow as much as 3% to $27.6 billion. If visitor arrivals come in at the higher end of the forecast, it would be positive for hotels because net new rooms are likely to grow by just 1.1%. Howarth HTL estimates a supply of 769 new rooms for 2018. At least 426 rooms are undergoing asset enhancement initiatives at Swissotel the Stamford and have been removed from the overall supply this year. Howarth has added back 329 rooms for 2019, taking the overall estimated supply next year to 1,664.
All this should be good news for hotel owners, including hospitality REITs with a Singapore focus. If visitor arrivals rise, there is limited supply; and with average occupancy rates in their mid-80s, revpar has the potential to rise. But it is a bit complicated.
Balancing stability and growth
Hospitality REITs are a lot more structured than retail, commercial and industrial REITs. The very nature of retail, commercial and even industrial REITs imply that rental reversions, tenant mixes and the way the leases are managed are key to their performance.
REITs are not the ideal vehicles in which to hold hospitality assets because hospitality is a volatile business. Visitors usually stay in hotel rooms for three to four nights. The only REIT that has the largest part of its portfolio in long stays is Ascott Residence Trust (ART), which owns serviced residences. Yet, hospitality REITs have to pay their unitholders a stable distribution per unit (DPU) or distribution per security. To minimise the impact of a volatile earnings base, REITs have a formula where some of the hotels in their portfolio get a minimum rent, usually from the sponsor, so that their unitholders can rely on a minimum DPS.
An additional point is that hotel REITs are likely to have higher costs than other REITs. For instance, hotel management fees are usually part of their property management fees, making property fees appear high. Hotels managed by global brands may have to pay management fees commensurate with the global brand.
A stapled security
Hotel REITs usually have two components: the REIT that holds the assets; and a business trust. The business trust is activated if the hotel that the REIT holds has no hotel manager. CDL Hospitality Trusts (CDLHT) activated its business trust when it acquired Hilton Cambridge City Centre in October 2015. For FY2017, revenue from the business trust rose 20% to $60.8 million because of contributions from The Lowry Hotel, which was acquired in May 2017.
Master leases and minimum rents
ART, the largest hospitality trust by assets under management and market capitalisation with its 75 properties, has a different formula from that of hotel REITs. The average length of stay by gross rental income is from long stays of at least three months, and 44% of gross profit is from management contracts with minimum rent and master leases. Last December, ART renewed its master lease agreements for four properties in France. “The minimum rent for some of the French properties was slightly lower than the previous rent. The pro forma financial effect of the renewed French master lease agreements on ART’s DPU for FY2016 is insignificant, at only 0.2%,” a spokeswoman says. “The new rents and rent ratios for the French properties are above the minimum rent by 8.1% and… well within or above the rent ratios of comparable tourism residences operated under lease agreements in similar or comparable locations.”
All hospitality REITs have a combination for fixed or minimum rents for stability, and a variable rent pegged to revenue and gross operating profit or net property income (NPI) to get some upside.
OUE Hospitality Trust (OUEHT) receives a minimum rent of $42.5 million from Mandarin Orchard Singapore and $22.5 million from Changi Airport Crowne Plaza, and variable rent comprising 33% of revenue and 27.5% of gross operating profit once performance exceeds the fixed rents.
“Based on our current view, we will get not more than the minimum rent for Crowne Plaza Changi Airport. That is our forecast unless 2018 turns out stronger than we expect,” says Chong Kee Hiong, CEO of OUEHT’s manager. The Crown Plaza Changi Airport complex was acquired by OUEHT in phases from November 2014.
“Room rates are a function of occupancy. If the market is strong, we can raise rates. If it’s weak, it’s quite difficult,” Chong says. “But [by dropping] the rates, we won’t help anybody. Our occupancy rate in 4Q2017 was in the mid-80s. Our highest occupancy rate was 93% to 94%, and that will come at the expense of rates. So far, 2018 has been stronger than 2017, but not that strong. Otherwise, we wouldn’t forecast 2% to 3% growth in revpar. “
Seven of CDLHT’s leases comprise a base or minimum rent and percentage of revenues and gross profit. It gets the entire profit from its two Japanese properties as well as Dhevanafushi Maldives Luxury Resort, The Lowry Hotel and Hilton Cambridge City Centre. CDLHT reported a 10.3% rise in NPI to $151.8 million and an 11.3% rise in distributable income to $110.3 million for FY2017. DPS fell 4.3% to 9.22 cents, owing to a rights issue, competitive trading conditions in Japan and the Maldives and lower contributions from Hilton CambridgeCity Centre.
Penchant for corporate customers
Hotel REITs prefer to rely on the corporate sector for customers, as they provide visibility.
The leisure market is a lot more volatile. In that respect, ART probably has the most stable portfolio. “The average length of stay is three months and 80% of guests are from the corporate segment,” says Beh Siew Kim, CEO of ART’s manager. “We’ve seen a general increase in demand in 4QFY2017.” ART has a December year-end.
Anecdotal evidence suggests corporate demand in the local market could be improving. “I’m cautiously optimistic. Certain sectors are doing extremely well such as IT and pharmaceuticals,” says Vincent Yeo, CEO of CDLHT’s manager. “Bookings are quite healthy, with Singapore being the Asean chair, and we are hosting some of these events in our Orchard hotels. Compared with last year, the pace is healthier and visibility is also better. Because of some of these events, there are blocks already booked.”
Would that translate into improved occupancy rates and revpar? “The industry expectation across the board is 4% to 5% revpar growth. Seven new hotels opened in 4Q2017, but the stronger calendar of events in CY2018 is supportive of the increased supply and, this year, the supply is fairly benign,” Yeo parries.
Chong of OUEHT says the competition for corporate clients remains strong. “Corporate rates are about 20% higher than transient. Everyone wants corporate customers because visibility is better; so, we’re all going after the same pie.” Still, he confirms that the number of request for proposals are higher, rates are firmer and OUEHT has signed on more corporates for this year. “One thing good about the corporate sector is they know what category of hotel they want. So, if they want a four-star, they will look for a four-star on Shenton Way or Marina Bay or Orchard Road.”
Which REIT is best for this year?
Frasers Hospitality Trust (FHT) announced a 4.5% rise in NPI from Singapore for 1QFY2018 ended Dec 31, 2017. Two more REITs reported organic growth for their Singapore portfolios for FY2017. CDLHT reported a 1.8% rise in NPI to $86.2 million for FY2017 for its Singapore hotels; OUEHT’s NPI grew 12.67% to $92.94 million. ART’s Singapore gross profit, the equivalent of NPI, more than doubled because of the acquisition of Ascott Orchard. Singapore-focused Far East Hospitality Trust continues to lag. It announced a 5.3% decline in NPI to $93.1 million for FY2017.
In January this year, FEHT announced the acquisition of Oasia Hotel Downtown for $210 million, financed by proceeds from the distribution reinvestment programme of $22.7 million and debt facilities of $195 million. The transaction requires an extraordinary general meeting for unitholder approval. Oasia Hotel Downtown is structured such that FEHT gets a minimum rent of $6.5 million a year, and a variable rent comprising 33% of the hotel’s revenue and 25% of operating profit.
Upon completion, FEHT’s gearing will rise to 37.5% compared with 34.4% as at Dec 31. As at end-2017, 41.6% of FEHT’s debt was on fixed rates, with an average debt to maturity of three years.
OUEHT’s average debt-to-maturity is 3½ years, gearing is at 38.8%, the highest among the hospitality trusts, and its fixed debt is 71%, which is quite high.
Both FEHT and OUEHT are pure-play, Singapore-focused hospitality trusts. As such, cost of debt, revpar and outlook are more visible, but neither are analysts’ favourites. “FEHT’s current DPU is near its fixed rent component, which will cap further falls in DPU,” says Harvard Chi, director of research at Quarz Capital. “Its enterprise value per room is also quite attractive versus the current transaction price for hotels.”
The other REITs are too geographically diversified to benefit specifically from a rebound in visitor arrivals amid a decline in supply growth in Singapore. They should still benefit from a global economic revival, however, particularly from corporate and business travel. CDLHT is analysts’ top pick.
FHT is diversified, with 40% of NPI from Australia, 21% from Singapore and the rest from Europe and East Asia. For FY2017, its DPS fell to 5.05 cents from 5.23 cents y-o-y because of a 32-for-100 rights issue in October 2016. FHT has a September year-end. For 1QFY2018, DPU fell marginally to 1.3107 cents because of new securities issued for expenses such as management fees. The number of securities rose to 1,865 million as at Dec 31, 2017, from 1,841 million a year earlier.
ART has a global footprint, with Singapore, China and Japan comprising 17.9%, 15% and 12.5%, respectively, of assets; Europe makes up 26.1% and the US 11.6%. It is perhaps the most sheltered from rising interest rates, should this be a concern (see table), with average debt-to-maturity at 4.1 years and 87% of debt on fixed rates. It also probably has the most stable structure, with a mix of long stays, minimum rents and master leases. Its NPI equivalent rose 2% to $226.9 million but DPU fell 14% to 7.09 cents because of a rights issue. The full impact of contributions from the acquisition of two German properties and Ascott Orchard will be felt this year.
