Hotel S-REITs may opt to privatise: analyst
Their yields are largely supported by fixed rents for master leases.
The four hotel-focussed S-REITs have begun to trade below its replacement costs, making them privatisation candidates, according to an analyst note by DBS Group Research,
The four Singapore hospitality focussed S-REITs have borne the brunt of the sell-off from the COVID-19 outbreak since late February and are now trading at 0.5-0.6x P/NAV, at -2 standard deviation (SD) of their 10-year mean. On an enterprise value (EV)/room basis, DBS said that all four S-REITs trade at an implied valuation/room of $0.5-1.2m/room, with CDL Hospitality Trust (CDLHT) and Far East Hospitality Trust (FEHT) priced the lowest at <$0.6m/room.
“This is even cheaper than recently transacted land costs for hotel sites in recent years. If hotel S-REITs continue to trade at such low valuations, we believe that their sponsors may consider taking them private given that most have not been active in raising capital and/or recycling assets,” said Derek Tan, analyst at DBS Group Research.
Amongst the four hotel S-REITs, Frasers Hospitality Trust (FHT) and FEHT could be attractive privatisation candidates as they have been least active in tapping capital since listing.
Such moves will cost the sponsors c.$450m-600m to buy out the minorities, assuming a 25% premium to current price, Tan said. “Whilst the amount may sound hefty in the current climate, this compares favorably to the $562m paid for the hotel site in Club Street in Singapore in January 2019.”
The sponsors of FHT and FEHT will then gain control of a diversified portfolio of 3,000 rooms (FEHT) and 4,000 rooms (FHT), which will return higher when operating conditions improve.
The share prices of the hospitality S-REITs have understandably been under pressure. In response to the changing operating environment amidst the COVID-19 pandemic, some hospitality S-REITs have closed their hotel operations or are actively looking to manage costs in order to maintain profitability or in many cases, stem further operating losses.
For now, their current leases are helping them cope with these difficulties. Tan stated that hospitality S-REITs earn their rental income pegged to the higher of a ratio of underlying operating income (% of revenues and % of gross operating profits) or fixed rent (or a revenue floor).
Based on DBS’ estimates, the fixed rent component contributes around 33% to as high as 77% of revenue estimates. FEHT and OUE Commercial Trust have the highest (70+% range).
Hospitality S-REITs’ distribution per unit (DPU) ranges from 1.5 cents to 2.6 cents, translating to a yield of c.2%-5% at current prices. Yields are largely supported by fixed rents for master leases, which are mainly payable by the sponsors.
Moving forward, RevPAR estimates for FY2020 and 2021 are 47% and 88%, respectively, of FY2019 levels before rebounding back from FY2022 onwards. The hotel S-REITs are trading at c.7%-8% FY21F yields.