• Recap of 3Q16 performance
• Hotel DD-SS expected to balance in FY18
• BUY ratings on ART, CDLHT, OUEHT

REIT yields between 7.1% and 7.7%

For the hospitality counters we cover, 3Q16 DPU growth ranged from -2.5% to -7.4% YoY, after adjusting for one-off items and equity financing. Growth in Hotel revenue per available room (RevPAR) ranged between -5.8% to -7.8% in 3Q16, with all the REITs citing poor corporate demand as the reason for declines. Growth in Serviced Residences (SR) revenue per available unit (RevPAU) ranged from -2.7% to -12.6% for 3Q16. Hospitality REITs under our coverage are currently trading at blended FY16/17 yields of 7.1% to 7.7%.

Recap of FY16 YTD

For FY16, we note that while the growth in tourist arrivals has been robust (up 10.3% YoY from Jan-Aug) and will probably outstrip the forecasted 4.1% growth in hotel room supply for the entire year, corporate demand has been tepid and the Singapore GDP growth rate forecasted to come in between 1% and 2%. Given that corporate demand commands higher average room rates (ARR) compared to the wholesale group, it is unsurprising that RevPAR has dropped 2.7% YoY for the Jan-Aug period. For the current quarter, our channel checks have revealed that Oct was a particularly poor month for hotels, and we will keep tabs on indicators for Nov and Dec.

NEUTRAL rating on the sector

Looking forward to FY17, with a forecasted 6.1% growth in hotel rooms and tepid economic growth outlook, RevPARs are expected to continue their decline, in our view, and especially so for hotels that rely on corporate demand. RevPARs are only expected to improve in FY18 with better supply-demand dynamics. Looking at RevPAR trends by segment, the Luxury and Midtier tiers looks most resilient for the Jan-Aug period, posting 0.0% and -0.8% YoY growth respectively.

While we expect single-digit RevPAR declines next year, current price levels look very attractive for some of the REITs under our coverage – we are positive on Ascott Residence Trust (ART) [BUY; FV: S$1.24], and CDL Hospitality Trust (CDLHT) [BUY; FV: S$1.48] and OUE Hospitality Trust (OUEHT) [BUY; FV: S$0.73]. Maintain NEUTRAL on the sector.

Source: OCBC Research - 21 Nov 2016