• Recap of 2Q16 performance
• Continued challenges in 2H16
• BUY rating on ART and CDLHT

REIT yields between 6.9% and 7.1%

For the counters we cover, 2Q DPU growth adjusted for one-off items and equity financing ranged from between -0.9% to -19.1% YoY. YoY growth in hotel revenue per available room (RevPAR) ranged from between -2.1% to -9.2% in 2Q16, with OUE Hospitality Trust’s (OUEHT) Crowne Plaza posting the least negative growth. While OUEHT’s results were among the most resilient in 1Q16, its 5-star Mandarin Orchard posted an 8.3% drop in RevPAR this quarter. Other REITs continue to cite poor corporate demand, which contributed to low to mid singledigit drops in their average room rates (ARR) and average occupancy rates (AOR). Hospitality REITs under our coverage are currently trading at yields of 6.9% to 7.1%.

Oversupply situation to worsen

The total room stock increased 6.5% in 2015, outstripping the modest 0.9% increase in tourist arrivals. We believe this contributed to last year’s decline in AOR, ARR, and RevPAR; they grew by -0.5 ppt, -4.8% and -5.3% respectively. Going forward, we believe the room supply injection will not be adequately matched by a growth in demand. The room supply is expected to increase another 4.7% to 63.8K rooms this year. Even though visitor days has shown a healthy start (up 4.5% from Jan-Jun this year), the outlook for corporate demand remains weak, especially for corporates in the Oil & Gas and Financial sectors. As such, we expect this supply overhang to worsen this year, contributing to downward pressures on RevPAR.

NEUTRAL rating on the sector

According to Singapore Tourism Board (STB) figures, for Jan through Jun 2016, AOR, ARR, and RevPAR increased 0.4ppt, -3.0% and 2.5% YoY respectively. Consistent with feedback from OUEHT, CDLHT and FEHT, Jun was an especially poor performing month within 2Q: RevPAR fell 11.2% YoY on the back of a 4.0 ppt decline in AOR and a 6.7% dip in ARR. We remain pessimistic about the operating performance of hospitality assets for the second half of this year given the aforementioned factors. Nonetheless there remains undervalued picks – we are positive on Ascott Residence Trust (ART) [BUY; FV: S$1.24], and CDL Hospitality Trust (CDLHT) [BUY; FV: S$1.53]. Maintain NEUTRAL on the sector.

Source: OCBC Research - 29 Aug 2016