Hospitality REITs - More investment options in tourism space

kiasutrader

Publish date: Tue, 28 Aug 2012, 10:19 AM

Historically, the de facto proxy for the hospitality sector has been CDL Hospitality Trusts due to its liquidity and size. With the proliferation in recent hospitality REITs listings, investors will have more choices to play the tourism theme going forward. Ascendas Land recently listed its maiden hospitality trust comprising 10 hotels in Australia, China and Japan in a S$385m listing, offering 437.3m units at S$0.88 each. Meanwhile, Far East Hospitality Trust (Far East HT) is offering 706m units at S$0.93 each to raise S$656m, which will have an initial portfolio comprising seven hotels and four serviced residences worth S$2.1b. These REITs derive the majority of their asset values and income from Singapore and Australia, two markets with favourable demand-supply outlook, with rising tourist arrivals that should drive up room rates and occupancies further.

Buoyant outlook for Singapore hospitality space. CDL HT and Far East HT are both leveraged to the Singapore tourism market, deriving over 80% of revenue from Singapore. Both trusts should continue to benefit from the rising tourist arrivals to the city state, which reached a historical high of 13.2m arrivals last year and is poised to attract 14-15m visitors this year. A host of new attractions, together with the integrated resorts and a growing MICE market should ensure that room demand continues to lead supply, driving high occupancies and room rates. The Singapore Tourism Board (STB) expects tourist arrivals to reach 17m by 2015 (representing 6.9% CAGR during FY11-FY15).

Outlook for Australia hospitality underpinnedby favourable demand-supply dynamics. In Australia, the market is equally buoyant, driven by a resilient domestic corporate travel market and rising tourist arrivals from Asian markets such as Japan and China. Due to high replacement costs, new supply in the country is limited and has helped to keep occupancies in gateway cities above 80%. The above trends are favourable for Ascendas HT, which have seven hotels in Australia accounting for 70% of its assets.

Our key picks: CDL HT and Far East HT. The forward yield for Ascendas HT is the highest among the three at 8.0%. Concurrently, CDL HT is trading at FY13F yield of 6.5% while Far East HT trades at 6.3% yield. Yields aside, we believe other important factors to consider include cost of funding, track record of the sponsor, growth of the underlying markets and attributes of the underlying properties. In this regard, we consider CDL HT and Far East HT as having superior risk-adjusted returns. Currently, we have BUY recommendation for CDL HT (BUY, TP S$2.20),a positive view on Far East HT and a neutral view on Ascendas HT.

Tourism in Singapore

Singapore tourism picked up since 2009. Tourism in Singapore has always been a major industry and contributor to the country's economy. Before the commencement of the two integrated resorts in 2010-2011, tourism receipts accounted for c.6.1% and c.4.7% to the country's GDP in 2010 and 2009 respectively. Since then, the industry sector of Singapore has gathered pace with the sector's contribution increasing to 4.1% (~6.8% nominal) in 2011.

2011 a respectable year for tourism. In 2011, visitor arrival rate reached a historic high of 13.2m, up 13% from the year before. During the same period, receipts from tourism also increased respectably to S$22.2b ' an increase of 17% YoY. Meanwhile, the number of conventions, conferences and trade shows grew 46% to 2,130 events in 2011, while tourism receipts generated from the meetings, incentives, conventions and exhibitions (MICE) industry rose 10% to S$550m.

Tourism industry expected to remain strong going forward. On the back of a full calendar of events and activities in Singapore, together with a few attractions scheduled to be opened in 2H12 (e.g. River Safari and Marine Life Park), coupled with the recent commencement in operation of the international cruise terminal and the SIA-backed budget airline - Scoot, we expect the tourism industry to remain strong going forward.

Conservative estimates by STB. Back in March, STB projected that Singapore will attract 13.5-14.5m visitors with S$23-24b in tourism receipts in 2012. These figures, generally considered as conservative, represent a YoY increase of c.3.5-8.0% in tourism receipts and c.2-10% in visitor arrivals. During the first five months of 2012, total visitor arrival came in at 5.92m representing a YoY growth of 12.3%. Although visitor arrival growth rate has slowed consecutively for two months, we expect this rate to rebound as we steps into a traditionally busier 2H of the year.

Further governmental support in the tourism industry. In this year's budget report, Singapore's government announced the injection of an additional S$905m into the Tourism Development Fund (TDF) over the next five years. Of which, one third of the funds will be channelled to building Singapore's position as a global lifestyle and business hub and bringing in international conferences and exhibitions. Concurrently, the government has also extended the GST Tourist Refund Scheme to international cruises passengers as Singapore increases its efforts in turning the city-state into a regional cruise hub.

Singapore tourism expected to double its GDP contribution in 2012. Going forward, STB expects tourist arrivals to reach 17m by 2015 (representing 6.9% CAGR during FY11-FY15). Concurrently, the tourism industry is expected to continue to grow, with the contribution to Singapore's GDP to double to as much as 8.0% (from 4.1% in 2011), bringing a projected tourism receipts of S$23 - 24b in 2012.

Three new areas to attribute to Singapore tourism. Three new sectors have been identified by STB as the growth driver going forward, including cruise tourism, arts and entertainment and travel agent industry. In order to boost the cruise tourism, Singapore has recently opened its new cruise terminal, doubling its berthing capacity. Meanwhile, the government plans to co-create and anchor more signature content such as arts and music festivals to attract more investors to Singapore. At the same time, local travel agents with established outbound businesses will be given more assistance in helping them to grow inbound traffic.

Hotel industry in Singapore

Strong year for hoteliers in 2011. On the back of a strong tourism industry, the hotel industry of Singapore has similarly performed well over the last two years. 2011 has proven to be a boom-time for hoteliers as gazetted hotel room revenue grew to S$2.6b, rising 27.8% YoY. Average room rate (ARR) gained 13% reaching S$245 while average occupancy rate (AOR) came in at 86%; bringing revenue per available room (RevPAR) to increase by 15% YoY to S$212.

Continues to be a supplier market. With a more diverse set of attractions in Singapore, we expect demand for hotels to continue to grow with hotel operators to continue to increase room rates going forward as occupancy continues to remain high.

Hotel owners expected to benefit from tight market. As the supply of hotels continues to grow at a milder rate of 3.8% CAGR during 2011-2014 vs a 6.9% CAGR growth of visitor arrival rates; coupled with high average occupancy rate (c.86% YTD), we expect the hotel owners to continue to benefit from a tight market.

Strict hiring rules likely to add pressure to industry. On the back of stricter rules on hiring cheaper foreign manpower, hotel operators are posed to experience challenges as tourism in Singapore continues to grow. Going forward, the industry will be forced to work more efficiently as hoteliers seek alternative source of talents to meet demand.

Cut in corporate spending experienced. Despite the continual growth in the hotel sectors, several hotel operators have suggested seeing a cut back in spending by international firms as the global market continues to remain volatile on the back of China slowing down coupled with the European debt crisis. Although revenue from tourism continues to offset this set back in revenue contribution from international firms, the risk remains as the European debt crisis continue to plague the international market with volatility.

Hotel industry in Australia

Hotel transactions dominated by Asian buyers. Over in Australia, investment activities in the hotel sector is at its highest level, with A$1.1b worth of hotels changing hands in 1H12, a doubling of the activity from the 1H11. Of this amount, 90% of the purchase transactions were made by Asian buyers looking to ride the upward trend in domestic and international travel in Australia. Notable deals include Shangri-La's purchase of the five-star Shangri-La Hotel it managed in Sydney for A$330m and the sale of three Marriott hotels in Sydney, Brisbane and Melbourne ' to Malaysian-listed Starhill REIT.

Underpinned by overseas visitors and domestic corporate travel. The number of overseas visitors to Australia rose a seasonally-adjusted 8.1% in June to 515,100 from a year ago, with visitors from China and Japan leading the increase. According to Deloitte Access Economics, the proportion of visitors from China is on track to double from 13.3% of tourist arrivals by 2014 from 6.4% in 2011, signalling a new demand driver.

Room rates and RevPAR expected to rise on the back of strong demand. With projected growth in both international visitors and the domestic business segment, room occupancy rates are projected to increase from 65% into 68% by 2014. Room rates, meanwhile, are expected to rebound further, reaching an average of A$160 by end-2014. RevPAR for 2012 are forecasted to reach A$100 by the end of the year, representing a 5.5% YoY increase and rising further to A$110 by end 2014.

Differing investor appetites. Despite the generally buoyant outlook for both the hospitality markets in Australia and Singapore, the take-up for the new REITs/Business Trusts has seen contrasting fortunes:

Ascendas Hospitality Trust: Primarily deriving its income from overseas, it met with tepid demand for its IPO and had to scale back its initial offering of 506-530m units to 437.3m units. This was despite a relatively attractive projected yield of 7.9% for FY13 and 8.0% for FY14.

Far East Hospitality Trust: Received an overwhelming demand from institutional investors and was able to price its IPO at the top end of its $0.86-0.93 range. Far East HT, which is offering 329.4m stapled securities ' 267.6m placement units and 61.8m public offer units ' and 376.3m units to cornerstone investors, saw its placement tranche more than 30 times subscribed and secured 10 established funds as cornerstone investors despite offering an annualised yield of 6% for FY12 and 6.3% for FY13.

We compare the two new hospitality REITs with the existing incumbent, CDL HT, to assess the attractiveness of the new listings.

Comparison of the Hospitality REITs

Portfolio size, payout policy and sponsors' stakes

In terms of portfolio composition, Far East HT's portfolio of seven hotels and four serviced residences, worth $2.14b, is comparable in size to CDL HT's $2.1b. Its sponsor Far East has an additional seven properties (comprising three hotels and four serviced residences) with over 1,200 rooms at various stages of completion that forms a potential pipeline for the trust. When eventually injected into the REIT, Far East HT could see its room portfolio increase 49% from 2,531 rooms to 3,773 rooms. Comparatively, Ascendas HT is a smaller offering with a portfolio size of $1.05b. Its sponsor Ascendas Land is better known for its track record in managing industrial properties rather than hotels. CDL HT also counts a strong sponsor in Millennium & Copthorne, which operates over 100 hotels worldwide.
Both Far East HT and Ascendas HT are adopting a 100% payout policy for the initial 2 years, before subsequently targets to pay at least 90% of distributable income. CDL HT currently pays out 90% of its distributable income, keeping 10% for working capital purposes and asset enhancements.
The sponsors' stakes in their respective REITs vary, from 35-56%. We believe Far East's 56% stake (diluted to 52% if an over-allotment option is exercised) will be diluted over time as it raises fresh capital to fund the acquisitions of pipeline or third party assets.

Geographic spread (by asset value)

Far East HT with 100% of its initial portfolio, based in Singapore, offers a pure play on the buoyant Singapore hospitality sector. This will continue to find favour from both international and domestic investors, in our view, with the former benefitting from the appreciating Singapore dollar while the latter will avoid foreign currency risks. CDL HT similarly derives over 80% of its valuation and income from Singapore. Ascendas HT, on the other hand, derives 100% of its assets and earnings overseas could face some potential risks on the land use approvals as well as shorter tenure for its Beijing hotels.

Capital structure
The three trusts featured have asset gearing of 25-30%, giving them adequate headroom to undertake future acquisitions before reaching optimum gearing of 40-45%. CDL HT has highlighted Australia and Japan as possible areas to seek acquisition opportunities, while Far East HT will likely concentrate on expanding through its pipeline assets in Singapore over the next 2-3 years. Cost of borrowings for the trusts ranged from 2.5-4.5%, as overseas market such as Australia and China have higher cost of funds.

Recommendation

The forward yield for Ascendas HT is the highest among the three at 8.0% (FY13E). CDL HT is currently trading at FY13 yield of 6.4% while Far East HT is to begin trading at 6.3% yield when it is listed on 27th August 2012.
Yields aside, we believe investors should consider the track record of the sponsor and the potential for the REIT to grow through accretive growth, either via asset enhancement or DPU-accretive acquisitions.
CDL HT and Far East HT, being backed by sponsors with track records as successful hotel operators and owners, stacked up well in this regard compared to Ascendas HT, whose sponsor is better known for industrial property management.
From a risk perspective, CDL HT and Far East HT with the majority of their assets based in Singapore, also offers purer plays on the strong Singapore hospitality market, without the attendant forex risks involved in owning overseas assets.
Ascendas HT's disparate assets across three markets is also unlikely to work in its favour, as its single hotel in Japan and two hotels in Beijing does not give it critical economies of scale to generate efficiencies. The tenure for its two Beijing hotels comes with a shorter tenure of 40 years and faced possible risks in the land use rights as the land was zoned for other uses.
Currently we have BUY recommendation for CDL HT with a target price of S$2.20; implying 5.7% DPU yield for FY13 earnings. Meanwhile, we have a positive view on Far East HT on the back of lower cost of capital with its 100% Singapore exposure, versus CDL HT which derives c.20% of its revenue and 17.5% portfolio valuation from overseas. At the same time, we have a neutral view on Ascendas HT despite an 8.0% FY13E dividend yield.

CDL-Hospitality Trusts

Respectable return during 1H12 on the back of growing tourism industry. Since the beginning of the year, despite a volatile investment climate, CDL HT's share price has rallied by 23.1%. Together with the dividend paid out, total return to investors has reached a sterling 26.0% YTD. Being the only hospitality trust with majority of the portfolio in Singapore, CDL-HT is the only REIT counter thus far to be able to enjoy the benefits brought about by the growing tourism in Singapore.

2Q12 DPU inline with expectations. CDL-HT recently reported a 2Q12 DPU of 2.92S'' (-1.4% YoY). The marginal drop in DPU is mainly due to the lack of a one off property tax refund recognised in 2Q11. Stripping the previous property tax refund, 2Q12 DPU grew by a respectable 10.2% YoY. Gross revenue and RevPAR came in at S$36.6m (+6.0% YoY) and S$217.0 (+5.9% YoY)
respectively, on the back of strong growth in visitor arrivals of 12.3% for the first five months of 2012 and a full quarter's revenue contribution from Studio M Hotel.

Respectable results from organic growth and Studio M Hotel. During 2Q12, although CDL HT experienced a growth of 5.9% YoY in NPI, this growth is mainly attributable to Orchard Hotel Shopping Arcade and the newly acquired Studio M Hotel. Stripping these two items, NPI for the remaining four hotels grew at a lower rate of c.4% (after stripping the one-off property tax refund). This is possibly a result of lower corporate spending amid concerns over the European debt crisis during 2Q12. However, going forward, we expect CDL HT to be able to grow steadily on the back of stable local corporate spending on events coupled with the strong growth in Singapore tourism.

Much headroom for future acquisition. Currently, with a low gearing ratio of 25.2% and an internal maximum gearing rate of 40.0% (which translates to an additional S$313m of debt the trust can take on), there is much room for CDL HT to undertake future acquisitions. Currently, management indicated that they are actively seeking for possible acquisitions in stable markets such as Japan and Australia.

Tourism continues to remain favourable for CDL HT. As tourism in Singapore continues to remain robust, together with the impeccable management skills of CDL HT and the ability to tap on potential pipeline of assets from both M&C and CDL, we expect CDL HT's performance will continue to remain solid. Given limited additional hotel supply in the coming years together with a growing range of new attractions and strong event calendar in 2012, CDL HT is well positioned to benefit from this stable demand.

CDL HT continues to remain strong going forward. In the subsequent quarters, we expect CDL HT to continue to register stable numbers on the back of 1) continual growth in Singapore's tourism; 2) demand continues to outstrip supply of new hotels and 3) RevPAR to remain strong in 2012. Given the bright prospect in the tourism industry of Singapore, we maintain our BUY call on CDL HT with a DDM based (COE: 8.6%, terminal growth: 2.0%) TP of S$2.20. CDL HT currently offers a forecasted FY12/13 yield of 6.0% and 6.4%; while trading at 4.6% spread vs the pre-crisis mean of 2.6%. Our TP represents a spread of 4.2%.

Currently trading at 4.5% spread to 10-year bond yield. CDL HT is currently trading at 4.5% spread to 10-year bond yield which is 190bps above its pre-crisis mean spread (2.6%), based on FY12 DPU. Our TP of S$2.20 translates to a spread of 4.2%.

Key risks. CDL HT's heavy reliance on corporate visitors (currently accounts for approximately 65% of the hotels' businesses) is one of the key risks to this counter. If the global economy in 2012 continues to soften, companies might cut down on corporate travel which would in turn lead to a decrease in demand for hotel rooms in Singapore. In addition, if the global economy enters into an economic crisis like the Lehman crisis in 2008, both the ARR and RevPAR will be adversely affected. This was observed in 2009 when both ARR and RevPAR fall by 22.7% and 27.6% respectively after the collapse of Lehman in 2008.

Far East Hospitality Trust

Listing statistics. Far East HT is issuing 329.4m stapled securities at S$0.93 each, with an over-allotment option of 65.9m stapled securities. 61.8m units will be available to the public and 267.6m placed out. In addition, 10 cornerstone investors have taken up a total of 376m stapled securities. Following the completion of the offering, the total number of outstanding stapled securities will be 1.6b units. Up to S$717.6m in gross proceeds will be raised through the offering. Each stapled security comprises a unit in Far East H-REIT and a unit in Far East H-BT.

Overview and structure of Far East HT. Far East HT is a Singapore-focused hotel and serviced residence hospitality trust listed on the SGX-ST. Comprising a real estate investment trust (Far East H-REIT) and a business trust (Far East H-BT), Far East HT has Singapore's largest diversified hospitality portfolio comprising hotels and serviced residences by asset value. The properties are valued at S$2.14b as at 31 Mar 2012, based on the average of Knight Frank's and Colliers' valuations. By asset value, the portfolio is 74.4% hotels and 25.6% serviced residences.

Strategically positioned properties in initial portfolio. The initial portfolio of Far East HT will, on the listing date, comprise 11 properties with seven hotels and four serviced residences, strategically located within close proximity to business districts, leisure attractions, MICE facilities and healthcare facilities.

Investment Highlights

First and only Singapore-focused hotel and serviced residence stapled group. Far East HT is the largest diversified hospitality portfolio comprising hotels and serviced residences in Singapore by asset value. It has a balanced and resilient portfolio, with well-located and high-quality assets providing easy access to business, shopping and cultural districts as well as healthcare facilities and enjoying MRT connectivity through major transport links.

Committed and reputable sponsor. Sponsor Far East Organization is Singapore's largest private property developer and both owner and operator of hospitality properties, with a strong track record in hospitality asset enhancements and operations and it is a leading developer in mixed-use property developments. Following the completion of the offering, FEO will continue to be the largest stapled security holder with a 56% stake (51.9% if an over-allotment option is exercised in full).

Positioned to benefit from Singapore's economic growth and tourism growth. The STB is projecting a target of 17.0m visitor arrivals for 2015, implying 6.6% p.a. for 2012-2015. According the Business Monitor International, business travellers are expected to grow at 10.7% p.a. for 2012-2015. In FY11, 43.6% of customers for the hotels in the initial portfolio and 87.8% of customers for the serviced residences in the initial portfolio were corporate (as opposed to leisure/independent).

Poised to benefit from the growth in medical tourism. Five of the trust's hotels (The Elizabeth Hotel, Landmark Village Hotel, Oasia Hotel, Orchard Parade Hotel and The Quincy Hotel) are situated within walking distance of major medical centres and hospitals popular among medical tourists.

Downside protection through the master lease agreements, while variable rental is expected to grow. For 2011, the fixed and variable rent composition was 55.9% and 44.1% respectively.

Growth opportunities
Far East HT targets to grow organically through RevPAR growth and asset enhancement initiatives, which include refurbishment programmes to refresh and upgrade its properties and optimisation of commercial spaces. On the acquisition front, its sponsor has granted Fast East HT right of first refusal to seven of its properties, which could potentially grow the total number of rooms/units of the portfolio from the initial 2,531 by 49.1% to 3,773.

Distribution yield
Based on the offering price, the manager's forecast and projected results, the annualized distribution yields for FY12 (annualized) FY13 are 6.0% and 6.3% respectively. Far East HT's distribution policy is to distribute 100% of its taxable income for both years and at least 90% thereafter.

Ascendas Hospitality Trust

Listing Statistics. Ascendas HT offered 437.3m stapled securities at S$0.88 per share, comprising a placement tranche of 355m stapled securities and a public tranche of 82.2m stapled securities. The total number of outstanding stapled securities after the completion of the offering is 803m units, with the sponsor Ascendas Land holding a 35% stake. The group raised S$581.3m in gross proceeds to finance the purchase of hotels and for acquisition-related costs.

Overview and Structure of Ascendas HT. Ascendas HT is a stapled group comprising A-HREIT (Singapore-based REIT) and A-HBT (Singapore-based business trust). The initial portfolio of Ascendas HT comprised of 10 properties with 3,482 rooms and a valuation of S$1,057m. This includes seven hotels in gateway cities of Australia, two hotels in Beijing, China and a hotel in Tokyo, Japan.

Investment Highlights

First and only Singapore-focused hotel and serviced residence stapled group. Ascendas HT's portfolio comprises of upscale businesses and leisure hotels in key cities in Asia and Australia, with proven resilience across economics cycles. The portfolio is diversified across hotel classes with well-balanced room portfolio across the economy (37.7%), mid-scale (37.8%) and up-scale (24.5%) categories.

Independent platform with the ability to engage best-in-class hotel operators. Being independent of a hotel developer or operator provides Ascendas HT with more options and access to the widest range of assets which it could potentially acquire. Ascendas HT is able to engage hotel operators which are best suited for its intended clientele and target markets.

Strong growth potential in key markets. Ascendas HT has identified several key asset enhancement initiatives, including upgrading of existing facilities and reconfiguration of existing spaces, to drive top-line growth. Approximately 75.9% of the valuation of the portfolio is from hotels under management contract, thus giving investors an opportunity to have greater exposure to the upside from their operations. The sponsor has also granted a right of refusal to Ascendas HT, thus allowing the potential for future acquisition opportunities.

Established sponsor and strategic partner with Pan-Asian footprint. Ascendas HT's sponsor, the Ascendas Group, is one of Asia's leading providers of business space solutions with more than 30 years of proven track record. It manages a portfolio in excess of 4.96m sq m as of 31 March 2012, and has grown its assets under management substantially from approximately S$1.73b as at 31 March 2002 to over S$12.9b as at 31 March 2012.

Distribution policy. Ascendas HT's distribution policy is to distribute 100% of distributable income till 31 March 2014 and at least 90% thereafter.

Source: OSK

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