Singapore hotel Reits not out of the woods yet

WHILE valuations for Singapore's hospitality Reits look attractive after the counters have been driven down in recent weeks, it may be too early for investors to take the plunge just yet.

For one, with countries around the world slamming their borders shut, there is very little visibility as to when travel demand will return.

Meanwhile, with hotels running at low occupancies, it is likely that cuts to distribution per unit (DPU) are imminent, analysts say.

In Singapore's case - unlike many other countries - it lacks a domestic market to fall back on. The "circuit breaker" which kicked in this week also removes the option of marketing staycations to Singaporeans - at least for the next one month.

For the local hospitality industry, which was anticipating a recovery in RevPAR this year after a protracted down cycle, the swiftly deteriorating conditions in the wake of the Covid-19 outbreak have come as a massive blow.

Preliminary data from the Singapore Tourism Board showed that arrivals fell 51 per cent to nearly 732,130 visitors in February, but numbers will be hit harder in March given that Singapore closed its borders to short-term visitors from March 24.

CBRE projects visitor arrivals could slump by 60-70 per cent year on year in March, with volumes to fall further in April from tighter measures to combat the pandemic.

CBRE estimates that hotel occupancy levels, however, could be partly cushioned from mid-March onwards as hotels saw demand from returning residents serving out Stay Home Notices at selected hotels, from Singaporeans turning to staycations as well as from Malaysian workers owing to the lockdown in Malaysia.

Citing talks with industry players, executive director for CBRE Hotels, Robert McIntosh, shared that hotel occupancy edged up slightly to 40-45 per cent in mid-March, up from 25-35 per cent earlier in that month.

Some analysts also reckon that hotel Reits might leverage the current downtime to carry out any outstanding asset enhancement initiatives since they would be able to do so right now without having to disrupt operations.

Derek Tan, analyst at DBS Bank, noted that the four Singapore-focused hotel Reits offer good value and are backed by strong sponsors, which lends support to downside risks.

But with 2020 shaping up to be a washout, investors may have to wait till 2021 to see the full impact of the recovery, cautioned Mr Tan. For those taking a long-term view, buying into good names should be profitable, he added.

CGS-CIMB analyst Kar Mei Eing said: "There's still more downside risk. Investors will benchmark to Global Financial Crisis (GFC) levels before having enough confidence to buy." She pointed out that Ascott Residence Trust (ART) was trading at 0.3x price-to-book ratio during the GFC, while CDL Hospitality Trusts (CDLHT) was 0.4x price-to-book ratio.

In contrast, CDLHT and Frasers Hospitality Trust are presently roughly at about 0.5x price-to-book ratio, while Far East Hospitality Trust (FEHT) and ART are around 0.5x and 0.6x respectively.

She added: "CDLHT is already trading near GFC levels so if there's a recovery, CDLHT may see a stronger rebound than the rest."

RHB Securities analyst Vijay Natarajan shares a similar sentiment. "Valuations are attractive at current levels but we still haven't reached the peak of this crisis. Even once borders around the world are lifted, it may take three to six months for travel to rebound as non-essential travel, such as leisure travel, may take some time to recover," he said.

With gearing levels under 40 per cent for the four Reits, gearing is seen as less of a worry than the bigger challenge of non-existent travel demand. Still, with some Reits having master leases and contracts with minimum guaranteed income in place, that will at least help to cushion the impact from weaker demand, Mr Natarajan pointed out.

With all this in play, investors will no doubt be keeping a close watch on DPUs, which analysts reckon will come under pressure as the earnings season kicks off.