• A good first two months
• OUEHT: Oakwood acquisition more likely than before
• Maintain Overweight on sector

Positive Total Returns Since Start of the Year

YTD, all four hospitality REITs under our coverage have posted positive total returns till 4 Mar’s close: CDL Hospitality Trusts (CDLHT) is up 14.4%, OUE Hospitality Trust (OUEHT) is up 10.9%, Ascott Residence Trust (ART) is up 10.1%, and Far East Hospitality Trust (FEHT) is up 9.1%. This compares to total returns of 6.1% from the Straits Times Index over the same period.

OUEHT: More Likely Than Before That Oakwood Premier Will be Acquired This Year

OUEHT is still trading at a discount to its peers – as of 4 Mar’s close, it offers a 7.1% FY19F dividend yield, compared to FEHT’s 6.3% and CDLHT’s 5.8%. We continue to expect the REIT’s assets to benefit from the benign hotel room supply situation locally and for its assets to receive a boost from Jewel Changi Airport’s opening and the Orchard rejuvenation plans. However, we believe that it is more likely that OUEHT will acquire sponsor’s asset Oakwood Premier within the year, based on an updated assessment of how well the asset has stabilized.

While we believe bite-size of the asset is likely to be quite small (S$268m to S$322m), we do recognize that given the tight cap rates for recent transactions in the market, it is possible that the final transaction price may come in above our expectations. To clarify, we do not see equity financing as a negative per se – it depends on whether it is paired with an asset acquisition that can contribute enough in additional income to compensate for the higher cost of financing. That said, the cost of equity creates a higher hurdle to cross and the potential acquisition remains an unknown. As such, we would prefer a more defensive pick.

ART: Our New Top Pick

We are choosing Ascott Residence Trust (ART) [BUY; FV: S$1.25] as our top pick within the sector. ART started the year with strong 4Q18 results, with portfolio RevPAU growing 5% YoY and 8 out of 12 management contract geographies clocking positive RevPAU growth in SGD terms. The REIT boasts a highly geographically diversified portfolio of high quality assets and given the ongoing macroeconomic uncertainties we look upon this defensive positioning favourably.

Post the divestment of Ascott Raffles Place, gearing is expected to drop to 32+%. This translates into a debt headroom of close to S$1b, and offers ART greater flexibility to pursue DPU accretive acquisitions. Maintain OVERWEIGHT on Singapore Hospitality.

Source: OCBC Research - 5 Mar 2019