Broker's take: DBS positive on hospitality S-Reits as hotels to reopen for staycations

DBS Group Research on Monday said the reopening of hotels for staycations in Singapore will be positive for all hoteliers in the Republic, including Ascott Residence Trust and Frasers Hospitality Trust.

Far East Hospitality Trust (FEHT) and CDL Hospitality Trusts (CDLHT) remain "prime beneficiaries", given their significant exposure in Singapore at about 100 per cent and 65 per cent of revenues respectively, wrote DBS analyst Derek Tan in a research note.

"Among the various hotels in Singapore, we believe that the Sentosa hotels will likely benefit first as they are probably the more attractive alternatives, given that most are still confined within local shores," DBS said.

The research team has a "buy" call on CDLHT and FEHT with a target price of S$1.30 and S$0.60 respectively, given their exposure in Sentosa.

As at 10.36am on Monday, stapled securities of CDLHT were trading at S$1.09, up S$0.02 or 1.9 per cent, while stapled securities of FEHT were trading at 52.5 Singapore cents, up 0.5 cent or 1 per cent.

For CDLHT, the prospective purchase of the W Hotel, which is expected to complete this month, will also set the stage for a gradual recovery over time, DBS said. In November last year, CDLHT proposed to buy the 240-room W Singapore luxury hotel in Sentosa Cove for S$324 million from Cityview Place Holdings, a wholly-owned subsidiary of City Developments Limited (CDL).

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Separately, Mr Tan noted that Singapore's tourism industry has been "worst hit by the Covid-19 pandemic", with very few tourists over the past few months.

Last Friday, the Singapore Tourism Board (STB) announced that visitor arrivals in Singapore for May 2020 had plummeted to just 880 - a far cry from 1.49 million visitors in May 2019.

Although hotels have been able to generate cashflows through government-related businesses such as the mandatory stay home notices for returning Singaporeans, that has tapered off from June, DBS said.

"While food establishments at the hotel premises have reopened in Phase Two, as a percentage of revenues, food & beverage typically consists of a smaller proportion of total sales (up to 30 per cent for most hotels, 60 per cent for vacation hotels) and will be insufficient to compensate for the drop in revenues from the sale of hotel rooms," it added.

Nonetheless, DBS noted that while staycations have never been a significant business for the hospitality groups, this first wave of demand will bode well, given the limited business alternatives.

"We note that the hospitality S-Reits derive rental income based on a rental formula that has a fixed component that is set by their respective sponsors; the ability to generate businesses from staycations will help alleviate cashflow issues for the sponsors, thus improving the sentiment for the sector over time, in our view," DBS said.

In an advisory last Friday, STB indicated that hotels may now apply to resume two activities - providing accommodation to guests for leisure, and opening their recreation areas for children. However, the establishments must first comply with safe-management rules and submit an application to the STB for assessment before reopening for business.

Some of these safe-management rules include limiting occupancy to no more than one person per 10 square metres in public spaces accessible to guests at any one time, excluding hotel staff, and reducing face-to-face mingling through staggering guest time at lobbies and guest facilities.