Hospitality REITs: SG hospitality oversupply
Singapore hotels pull down 2Q13. CDLHT’s 2Q13 NPI contracted 4.4% YoY chiefly due to poorer performance of its Singapore hotels in a tough operating environment. The performance was in line with OIR’s estimates but below the street’s. FEHT’s all-Singapore portfolio was also affected by general industry conditions and 2Q13 NPI missed its IPO prospectus forecast by 6.8%. ART saw a 4.1% YoY drop in 2Q13 NPI due chiefly to its properties in Singapore, China and the depreciation of the JPY. However, ART still managed to post a 3% YoY increase in 2Q13 DPU; a S$2.7m reversal of over-provision of prior years’ tax expense bumped up distributable income, helping to compensate for a greater unit base from a placement in 1Q13.
Operational pressures. ART’s 2Q13 Revenue per Available Unit (RevPAU) for the serviced residences in its global portfolio fell 9% YoY to S$142 and this was mainly due to the divestment of the Cairnhill property and weaker performance from China and Japan (depreciation of JPY). CDLHT’s Singapore hotels saw 2Q13 Revenue per Available Room (RevPAR) fall by 8.5% YoY to S$193 due to increased competition, decreased corporate demand and the absence of a biennial event in April. FEHT’s Singapore hotels performed better, with RevPAR up 0.3% YoY at S$168, although this figure was still 11% lower than the IPO prospectus forecast of S$189.
Good financial standings. ART has a good interest coverage rating of 4.2x and its gearing at 40.2% is still significantly below the 60% maximum permitted for REITs which have credit ratings. The hospitality REIT subsector shows healthy average leverage of 33% and high interest coverage of 7.4x. We do not anticipate any significant funding concerns for ART, CDLHT and FEHT.
Challenging environment for the Singapore hospitality sector. We believe that hotel room supply will expand at 6.5% p.a. over 2013- 2015 while hotel room demand will grow at only 5.8% p.a. Apart from the usual uplift in even-numbered years like 2014 from more MICE events, this supply-demand imbalance will put pressure on real RevPAR growth and in turn could affect top-line organic expansion for hospitality REITs. It is worth highlighting that we anticipate a huge growth of 10.9% p.a. in mid-tier room supply, which both CDLHT and FEHT are directly represented in.
Remain NEUTRAL. Overall, we are NEUTRAL on the Hospitality REITs subsector in Singapore given that the substantial supply of hotel rooms in Singapore will pose medium-term pressure on hotel room rates, especially at the mid-tier category, which CDLHT and FEHT are directly exposed to. We have HOLDs on Ascott Residence Trust [FV: S$1.37], CDL Hospitality Trusts [FV: S$1.56] and Far East Hospitality Trust [FV: S$0.92].
Publish date: 09/09/13