F. Hospitality REITs: Poor outlook for 2014 hospitality
Another weak quarter for Singapore hotels in 3Q13
Hospitality REITs generally reported a set of uninspiring 3Q13 results, due to continued softness in the Singapore hospitality industry. CDL Hospitality Trusts’ (CDLHT) 3Q13 NPI contracted 1.7% YoY to S$33.0m chiefly due to a lackluster showing for its Singapore hotels in an environment where business travel budgets were tightened and competition heated up with additional hotel room supply. This quarter’s performance was in line with ours and the street’s estimates. Like 3Q13, 1Q13 and 2Q13 also saw CDLHT registering YoY declines in gross revenue, NPI and income available for distribution.
Far East Hospitality’s (FEHT) all-Singapore portfolio, consisting of hotels and serviced residences, was also affected and 3Q13 NPI missed management’s forecast (based on IPO prospectus and the circular for the acquisition of Rendezvous). However, the results were again in line with the street’s expectations, given similar performance in 1H13. Ascott Residence Trust’s (ART) revenue climbed 11% YoY to S$86.1m, mainly due to additional revenue of S$14.1m from the properties acquired in second half last year and on 28 Jun 2013. Gross profit climbed 10% YoY to S$44.8m. Unitholders' distribution increased 17% YoY to S$30.0m but DPU only rose 6% YoY to 2.37 S cents as a placement had been carried out in 1Q13. The results were ahead of ours and the street’s expectations, partially due to FX effects.
Operational pressures persist
3Q13 Revenue per Available Room (RevPAR) for CDLHT’s Singapore hotels fell by 6.4% YoY to S$191. FEHT’s Singapore hotels performed better, with RevPAR, excluding the Rendezvous property (which was acquired on 1 Aug), only falling 2.7% YoY to S$167.1, which was still 10.2% below management’s forecasts.
ART’s 3Q13 Revenue per Available Unit (RevPAU) for its global portfolio came out to S$133, 10% lower than 3Q12’s. The decrease was mainly due to divestment of Somerset Grand Cairnhill Singapore and weaker performance from Philippines and Japan (the latter due to the weakening of the JPY).
Post-Sep equity fundraising and refinancing
The hospitality REITs continue to have healthy debt profiles. As of 30 Sep 2013, average gearing stood at 33.6% and interest coverage was at 6.3x.
ART has a good interest coverage rating of 4.2x and its gearing at 41.1% was still significantly below the 60% maximum permitted for REITs which have credit ratings. ART has since carried out a rights issuance to raise gross proceeds of approximately S$254m, of which ~S$204.9m will be used to pay down debt (bringing gearing down to ~35%). ART intends to acquire new assets in 1H14 with the additional financial flexibility and is comfortable with raising gearing back up to the low 40s in percentage terms.
CDLHT had a debt duration of 1.8 years as of 30 Sep, however, this has been lengthened as subsequent to that date, the 1-year bridge loan of US$72.8m (used to fund the purchase of Angsana Velavaru) maturing Jan 2014 was refinanced with a 5-year fixed rate term loan facility. This refinancing also brought the fixed-rate proportion of debt to 64% from 49%. In Dec, CDLHT entered into conditional land and business sale agreements for the acquisition of Jumeirah Dhevanafushi in the Maldives at US$59.6m (~S$74.8m). The acquisition will be fully funded by debt, bringing gearing up from 28.1% to 30.6%. Management emphasizes that CDLHT still has headroom to pursue additional acquisitions without equity fundraising.
FEHT saw its gearing increase by 2.3 ppt QoQ to 31.6% because of loans drawn to partially finance the acquisition of the Rendezvous Property. Possible acquisition targets among the ROFR properties for 2014 include 225-unit Orchard Parksuites, 207-unit Orchard Scott Residences, 51-unit West Coast Village Residences and the 37-room Amoy Hotel, which began operations in Nov 2013. If the former two assets were to be acquired, equity fundraising would be likely.
Hospitality sector faces a challenging 2014
We believe that hotel room supply will expand at 6.5% p.a. from end- 2012 to end-2015 while hotel room demand will grow at only 5.4% p.a over the same period. While 2014 should see more MICE events given that biennial events are generally held in even-numbered years, our industry sources indicate that hotel bookings up to Feb 2013 are still soft, with limited visibility beyond that. With no significant catalysts in sight over the short-term, we continue to anticipate a weak outlook for Singapore tourism in 2014. Breaking down the projected growth in hotel room supply for end-2012 to end-2015, we note that the 52% of the new room supply is from the Mid-tier: Economy (+3.6% p.a.), Mid-tier (+10.9% p.a.) and Luxury and Upscale (+4.7% p.a.). Note that CDLHT and FEHT have substantial exposure to Mid-tier/Upscale hotels. For more of our analysis and views about the outlook for the Singapore hospitality sector, please refer to our 26-page Hospitality report, “Opening weakly in 2014”, published yesterday.
Overall, we continue to be NEUTRAL on the Hospitality REITs subsector in Singapore given that the substantial new and upcoming supply of hotel rooms in Singapore. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. Given the difficult landscape for the local hospitality industry, our preferred pick in this subsector is the geographically-diversified ART [BUY, S$1.33 FV]. We like ART’s comprehensive ongoing asset refurbishment program, which can result in substantial boosts in average daily rates, e.g. 20-35%. We believe that the acquisitions in Asia it is exploring for 1H14 could serve as positive rerating catalysts for ART.