• 1Q19 RevPARs look to be soft
• ART and FEHT have rallied towards our FVs
• Downgrade sector to NEUTRAL

Expecting a Weak 1Q19

Despite a strong rally for hospitality REITs YTD, we are likely looking at a soft 1Q19 in terms of RevPARs. According to recent data from Singapore Tourism Board (STB), visitor arrivals were up 3.83% YoY in Jan and 0.05% YoY in Feb, with visitor days up 5.3% and 3.3% correspondingly.

Meanwhile, STB data reflected poor RevPAR performance from Upscale and Midtier hotels for the first two months of the year: Upscale hotels posted -3.8% and -6.5% YoY RevPAR growth for Jan and Feb respectively, while Mid-tier hotels posted 1.0% and -4.3% YoY RevPAR growth. Our channel checks have revealed that March was also a subdued month for the industry.

Given that the supply situation remains favourable, we believe the softness in RevPAR has more to do with the absence of events that were held last year (e.g. the biennial Singapore Airshow).

Relative to 2017 figures, upscale RevPAR was up 0.5% and 0.7% in Jan and Feb respectively, while mid-tier RevPAR was up 9.4% in Jan but down 0.8% in Feb. As most of the local assets owned by hospitality S-REITs are either Upscale or Mid-Tier, we expect a weak set results for SG-heavy REITs like Far East Hospitality Trust (FEHT) and CDL Hospitality Trusts (CDLHT) for 1Q19.

CDLHT: Other Drag Factors in 1Q But Positive Catalysts From 2Q19 Onwards

While CDL Hospitality Trusts (CDLHT) previously disclosed that its Singapore RevPAR increased by 5.1% YoY for the first 27 days of Jan 2019. We believe that – subsequent to robust RevPAR growth seen in these first 27 days – CDLHT’s SG RevPAR moderated closer to what was seen in the industry, as reflected by STB’s figures.

Beyond the soft quarter locally, we believe the REIT’s 1Q19 results will be further dragged down by the closure of Dhevanafushi Maldives Luxury Resort as well as the asset enhancement initiatives at Orchard Hotel.

Beyond 1Q19, we anticipate 1) the opening of the rebranded Raffles Maldives Meradhoo Resort in early 2Q19, and 2) improved contributions from Orchard Hotel post refurbishment. Postrenovations, Orchard Hotel will be one of only four hotels in Singapore with a ballroom that can accommodate 1K or more guests.

ART and FEHT Have Inched Up Toward Our Fair Value

On 10 Jan 2019, we upgraded Ascott Residence Trust (ART) from a Hold to a Buy and then chose it as our top pick within the sector on 5 Mar 2019. Since our upgrade report till 12 Apr’s close, ART has posted total returns of 12.8% vs. the Straits Times Index’s (STI) 5.9% and the FTSE Straits Times REIT Index’s (FSTREI) 9.1%. Similarly, since our 13 Aug 2018 upgrade report on Far East Hospitality Trust (FEHT) till 12 Apr’s close, FEHT has posted total returns of 14.2% vs. the STI’s 3.0% and the FSTREI’s 11.2%. As our fair values for each remain the same, we are downgrading both ART and FEHT today, each from Buy to Hold.

Downgrade Sector to NEUTRAL

As at 12 Apr’s close, ART, CDLHT, and FEHT are trading at FY19F yields of 5.9%, 5.7% and 5.9% respectively. While we continue to see a twoyear runway for RevPARs to improve given the benign supply outlook, we downgrade Singapore Hospitality from Overweight to NEUTRAL given the relatively tight dividend yields. Out of all the hospitality REITs under our coverage, we see the most upside for ART as at 12 Apr’s closing prices.

Source: OCBC Research - 15 Apr 2019