• Negative total returns since Jun
• Remain cautious on i/r risk
• Mid-Tier hotels look to outperform

Total Returns Since Start of Jun: Negative, But Quite a Range

Since the start of Jun to 9 Jul’s close, hospitality S-REITs under our coverage have each posted a total return ranging from -0.9% (Ascott Residence Trust) to -5.3% (Far East Hospitality Trust). This compares to -5.8% for the STI, the - 9.1% for FSTREH, and -0.2% for FSTREI over the same period.

Key Risk: Same Old Interest Rate Hikes

While valuations now look more attractive than they were previously, the key risk in our view is still that of rising interest rates, and the impact of that trend on the dividend yields investors will subsequently demand from REITs. The yield spread for the FSTREI currently stands at 367 bps, ~1.1 standard deviations below its 5-year average – by no means attractive. FY18F yields for the hospitality REITs under our coverage now range from 6.2% (CDL Hospitality Trusts) to 6.8% (Far East Hospitality Trust).

Visitor Arrivals: Continue to Post Decent Growth in 2Q

For 2Q, Singapore Tourism Board’s latest figures show a respectable +4.9% YoY growth in April’s visitor arrivals, although more tepid than the +7.3% YoY growth we saw for the Jan-Mar period. Correspondingly, visitor days are up +2.5% YoY in Apr. Changi Airport’s statistics also appear to indicate decent pace of growth, with passenger movements up +5.1% YoY in Apr and +5.8% YoY in May.

RevPAR Growth: Mid-Tier Outperforms Upscale; Look to FEHT

On the other hand, RevPARs for Economy hotels are up +13.0% in Apr, followed +6.6% for MidTier, +4.1% for Luxury and +0.4% for Upscale hotels. We believe that Mid-Tier hotels are set to outperform Upscale hotels in terms of YoY growth as we progress into the year, given the relative underperformance of the former last year with the many Mid-Tier hotels that came on-stream.

Given that Far East Hospitality Trust’s (FEHT) assets are concentrated in the Mid-Tier segment, we expect them to enjoy robust RevPAR growth in 2Q and onwards. Recall that FEHT’s hotel assets posted a 3.3% growth in RevPAR in 1Q17. With interest rate risks in mind, our top pick remains Far East Hospitality Trust [BUY; FV: S$0.735]. Maintain NEUTRAL.

Source: OCBC Research - 10 Jul 2018