I’m not a huge fan of hospitality trusts. There, I’ve said it.
And I’ll tell you why.
Hospitality assets (hotels, serviced apartments and so on) tend to have volatile profits, lower occupancy rates and are largely seasonal.
Hospitality assets are usually well-located in each country.
But these assets are also highly competitive.
Leisure travellers and corporates are price sensitive customers.
But, unlike airlines, hospitality trusts offer a much safer way to play on the air travel recovery. I’d pick investing in an aircraft versus a property.
What’s surprising is many hotels survived COVID.
In fact, I think right now, it’s interesting to look at some of these REITs today — Singapore hotels’ RevPAR are quietly climbing back up over the last two years.
Source: Business Times
And I’m going to rank what are I think are the best Singapore hospitality REITs to buy today.
Let’s dive in.
Is it too early to buy Singapore Hospitality REITs?
Singapore hospitality REIT shares are still going no where.
Source: Yahoo! Finance
That’s why there’s something appealing about Singapore hospitality REITs.
Many countries are opening up for travel, airports are packed, people and companies are rushing to fly again.
Yet, Singapore hospitality REIT shares are going no where.
So far, Singapore hospitality REIT shares are a total wreck since 2020. Shares have yet to fully recover. And that’s because the market is still uncertain about rising interest rates, inflation and the war in Ukraine.
These REITs have a much lower dividend pay out than their 2019 dividends, P/B are trading off their historical average and trade at a much lower dividend yield.
But that’s not the end of the world.
Hospitality Trusts are cyclical businesses. And they ride with a growing economy.
What makes them a popular investment is they have always paid a high dividend yield. In fact, of these four Singapore hospitality REITs paid their 2019 dividends, they have yielded between 6% to 10%. It isn’t too bad.
That’s because hospitality assets are based on a gross profit + variable rent.
And since the global financial crisis, many hotels and serviced apartments have done very, very well.
So here are my thoughts on how I rank these Singapore hospitality REITs today.
#4: ARA US Hospitality Trust (only for the brave)
There’s just too many things I don’t like about ARA US Hospitality Trust.
Actually, I’m more disappointed with its REIT manager, ARA. Look, ARA is a capable property manager. But I’m surprised they listed this REIT with a bunch of not so great assets.
ARA US H-Trust is a “pure play” US hotel REIT.
Today, it has 41 hotels across the US worth over US$722 million. These are “upscale” hotels — the Hyatt brands, AC Hotels, Courtyard by Marriott and Residence INN by Marriott. Corporate and leisure holiday travellers demanding more comfort drive these hotels’ demand.
Most of these assets sit on freehold land, total 5,340 rooms.
What I like is the biggest revenue driver for ARA US H-Trust is they lease their properties to the highly reputed Hyatt brands of hotels.
Yet, ARA US H-Trust has been largely disappointing.
Occupancy rate has dipped so much to around 51%. Recently, it recovered to 62% Typical hospitality properties usually have a much higher occupancy rates.
That’s why, ARA US H-Trust borrowing costs is high — 3.4%. It reflects the higher credit risks of these hotels.
Any higher uptick in interest rates is going to challenge ARA US H-Trust’s finances.
What’s more concerning is its gearing ratio already hits 44%, close to MAS’s gearing limit of 50%. This is on top of ARA US H-Trust’s high interest expense. Last year, its interest coverage ratio only covered 2.2x.
This means, ARA US H-Trust either has to sell down its properties or raise new shares to raise capital to buy new properties.
The growth potential for ARA US Hospitality Trust is an improving US economy.
ARA US H-Trust is the most speculative hotel REIT. Its P/B ratio is heavily discounted to 0.76x. While it only pays a dividend yield of 1.5%, a strong US recovery could see this stock soar back up. But then again, it’s a risky play considering ARA US H-Trust has a set of weaker hotels versus other Singapore hospitality REITs.
ARA US Hospitality Trust ranks fourth as my fourth best Singapore hospitality REIT to buy (in other words, stay away).
#3: CDL Hospitality Trust
At S$1.5 billion market, CDLHT is a well-balanced REIT.
It doesn’t have the best financial numbers right now, but it’s a well-diversified REIT with properties across Singapore, UK, New Zealand, Maldives and Japan.
Most of its leases were affected by COVID. Even though it’s slowly recovering. In fact, its 1Q2022 showed improvements on its RevPAR. And has improved over the last few months.
1Q2022 master leases revenues have remained flat as compared to last year.
While its managed hotels revenues grew 36% to S$46 million as compared to last year.
Close to half of CDLHT ’s revenues come from its Singapore hotels, which includes Orchard Hotel, Grand Copthorne Waterfront Hotel, M Hotel, Corpthorne King’s Hotel, Studio M and W Singapore at Sentosa Cove.
ts Singapore hotels RevPAR grew 40% as compared to a year ago. There’s a huge demand for hotels. Singapore recorded close to 250,000 visitors during 1Q2022. This only accounts for 5% of 1Q2019 visitors.
Going forward, I expect CDLHT ’s main performance on its shares and dividends to come mainly from its Singapore assets. Market demand is recovering, with staycations and corporate events driving demand. Furthermore, there’s less restrictions on weddings and social functions.
Even though CDLHT’s occupancy is only at 54.5%, this should recover over the next few years.
Like Ascott Residence Trust, CDLHT trades close to its book value. And CDLHT’s dividend yield is also around 3.4%. If you ask me, I prefer Ascott Residence Trust over CDLHT any time.
If CDLHT’s dividends resumed to its pre-COVID levels, its dividend yield would be 7%, which is only slightly higher than Ascott Residence Trust.
CDL Hospitality Trust ranks as my third best Singapore hospitality REIT to buy.
#2: Ascott Residence Trust (The Motherlode of Hospitality)
Ascott Residence Trust is the kind of daughter you want to bring home to meet your parents — dependable, trustworthy, and willing to ride through tough times with you.
Yet ART almost died a horrible death during COVID.
It went into a cardiac arrest and saw its dividends plunged by 43.3% versus 2019.
It recovered quickly right after COVID gotten better.
Revenues, income and gross profits almost withered next to nothing. Even though ART continued to maintain most of its long term leases, hotel operators simply aren’t able to afford paying any rent to ART. That led ART to pivot to student accommodation.
It’s a good move.
Student accommodation provides longer stay students, willing to lock in longer leases than short-term term stays with corporate and seasons travelers. The real problem is students are price sensitive customers. But compared to traditional hotel and serviced apartments, student accommodation still loses out to the long-term relationships hotels and serviced apartments can build with corporate clients.
But what I truly like about ART is its diversified portfolio of freehold assets across developed markets — Australia, China, Japan, Europe countries, US and Singapore.
This creates a healthy balance that’s not seen in other Singapore hospitality REITs.
ART currently trades close to its book value, which is a stable valuation. It’s almost like a bond. ART is a great way to position for a strong hospitality recovery without losing too much sleep.
Dividends are nothing to shout for. At 3.8% dividend yield, there’s some recurring income.
DPU has dropped from 7.61 cents per unit in 2019, and dwindled to 4.3 cents per unit last year.
If you expect air travel to resume to pre-COVID levels, ART could see a flood of dividends rushing back.
I take comfort in its low gearing, high interest coverage. This gives this motherlode of Singapore hospitality REITs plenty of room to increase firepower.
If ART’s DPU resumed to its 2019 dividend level, that would be a 6.7% dividend yield at today’s shares. Not too bad.
I rank Ascott Residence Trust as my second best hospitality REIT to buy.
#1: Far East Hospitality Trust (My Top Singapore Hospitality REIT)
I like Far East Hospitality Trust amongst all four hospitality REITs.
This is because it’s the most resilient hospitality trust amongst all the Singapore hospitality REITs.
First, its DPU didn’t drop as much.
Next, it has a unique selling point on its properties – boutique hotels that are understated, and have a heritage angle to it. It’s the mid-tier, “non cookie cutter” type of hotels that appeal to corporate travellers who want a more budget yet comfortable hotels. And appeals to leisure travellers (both locals and tourists).
And FEHT’s rent leases have allowed them to be more resilient.
Far East Organization is the master lessee to most of their hotels. And their rental agreement has a downside protection. Even when tourists dropped to zero, there’s a fixed rent paid to Far East Hospitality Trust.
This is different from the other hospitality trusts.
This, in my opinion, allows FEHT to weather the downsides better than its peers.
What’s more important here, FEHT probably has the most optimal potential for recovery. At this point, it has the lower P/B ratio, and dividend yield is the highest. If it recovers, it should recover safely to around 6% dividend yield.
Sponsor is no stranger to Singapore investors.
Far East Organization is one of the largest private developers. Only problem is its private, so I’ve no knowing exactly how their financial position is. But Far East Organization is probably one of the more financial savvy developers. They have been operating since 1950s.
The thing is, FEHT has been reducing its gearing. What I realized about hotel REITs is their gearing tends to be higher, have lower interest coverage and pay higher interest costs.
If FEHT recovers, it could revert to around 4 cents per unit, a 6% dividend yield. Today, FEHT trades at 4% dividend yield.
Far East Hospitality Trust is currently my top favourite Singapore hospitality REIT buy today.
Final Thoughts
Singapore hospitality REITs are appealing for income investors betting for an air travel rebound. These REITs are backed by high quality properties (versus airline stocks).
More importantly, these REITs have recovered from the depth of COVID in 2020.
The big drawback for these hospitality REITs are their lower dividend payout right now. If their dividends revert to pre-COVID dividends, it should be yielding between 6-10%.
My favourite is probably FEHT, followed by Ascott Residence Trust. These are my two highly rates hospitality REITs.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
