Wednesday, April 19, 2017

Hospitality Industry - The Next Investment Opportunity?

Many great investment opportunities happen when the industry is still depressed and where the individual companies are undervalued. I've been looking for more investment opportunities and the hospitality industry came up on my radar.

The hospitality sector is not all gloomy for every country. The 2 stocks that I have which have direct exposure in the hospitality industry are Ascendas Hospitality Trust and CDL Hospitality Trust. Ascendas hTrust was bought quite long ago back in 2014. It has been providing me a dividend yield of about 7.5% for the past few years and price has gone up as well. Its main business is in Australia with 56% of its net property income coming from there. The rest are from Singapore (12%), Japan (24%) and China (8%).

CDL Hospitality Trust on the other hand was bought quite recently in December 2016. It is giving about 7% dividend. This is a different investment as its main income comes from Singapore (62%) with the rest from Australia (10%), New Zealand (10%), Maldives (8%), UK (6%) and Japan (4%). Investing in CDL hTrust is a different strategy which I will explain more in this post.

Understand more about the hospitality industry 

Before we go into the investment opportunities in the hospitality industry, it is crucial to understand what has happened and is happening in the industry. The hospitality industry is a broad category of fields within service industry that includes lodging, event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. In this article we will focus more on lodging which is all about hotels and serviced residences.

As mentioned earlier, CDL hTrust has most of its business in Singapore. Some of the hotels they own are Orchard Hotel, Grand Copthorne Waterfront Hotel, M Hotel, Copthorne King's Hotel, Studio M Hotel and Novotel Singapore Clarke Quay. Sounds familiar to you?

The hospitality industry is currently not doing well in Singapore. This is the best time to look at it when it is not doing well. There are some signs of recovery but is this sustainable? Let's look at the current situation first

Oversupply of hotel rooms in Singapore

The current gloom is partly due to the oversupply of hotel rooms in Singapore. An estimated 2610 more rooms were added in 2016 and it is expected that 3767 more rooms will be added in 2017. This means that the hotels business is expected to remain competitive in 2017. However, hotel rooms supply will slow down in 2018 with only 69 more expected rooms. I read that it is harder to get a license to start a hotel business in Singapore now and the government is also controlling the number of hotel rooms supply moving forward in 2018.

Hotel Room Supply
With hotel room supply tapering off, this industry should see some recovery moving forward which brings me to the next few points on visitors arrival and the Revenue per available room (RevPAR)

Visitors Arrival in Singapore

Visitors arrival is crucial for the hospitality industry in Singapore. The more visitors, the more revenue for the hotels. Visitors arrival is still stable with about 1.36 Million tourist in Singapore in Feb 17. Visitors arrival have grown 5.1% for the past 9 years but have stagnant since 2014.

Revenue per Available Room (RevPAR)

RevPAR is a key indicator in the hotel industry to gauge the average hotel room rates in Singapore. It is similar to the rental rates we see for the property market. An improvement in the RevPAR signals the recovery of the industry. A higher RevPAR also means the hotels are able to make more revenue per room they have. Its like you have a property and you can rent out for a higher price.

RevPAR for CDL hTrust has decreased -8.6% in FY16 as compared to FY15. RevPAR for the whole hotel industry in Singapore is on a decline mainly due to the oversupply of hotel rooms. With the oversupply tapering off in 2018, we should see some recovery in the RevPAR as well.

Initiatives by Singapore Tourism Board (STB) and Ministry of Trade and Industry (MTI)

If you've been reading the news, there has been many new initiatives by STB to attract more tourists to come to Singapore. Singapore Tourism Board (STB) and The Walt Disney Company Southeast Asia (Disney) announced a three-year collaboration, aimed at providing unique and fun experiences themed around Disney’s biggest brands and most popular stories and characters. As part of the collaboration, locals and visitors to Singapore will be entertained with a range of exciting experiential activities starting with Star Wars, followed by Marvel and Disney Animation/Disney Pixar themes in 2018 and 2019 respectively.

Also, MTI announced a Hotel industry transformation map to transform the hotel industry for sustainable growth. Four strategies were identified which are, building manpower-lean business models; developing new solutions through innovation; growing businesses through internationalisation; and building a strong pipeline of quality talent.

Lastly, Changi Airport is expanding with the new Terminal 4 opening this year and the new Terminal 5 which is still works in progress. A new Jewel at Changi will also be opening in early 2019. All these will attract more visitors into Singapore and boost the hotel industry greatly.

Stocks which are in the hospitality industry

Now, after understanding about the hospitality industry, let's look at some stocks which are in this business. These may be good investments when this sector recovers. I'm looking particularly at stocks which have more exposure to the hospitality industry in Singapore as it is the worst hit now and possibly will be the best when it recovers.

CDL Hospitality Trust

The first stock is CDL hospitality trust. Below is the 3 years chart of CDL hTrust where we see there was a sharp drop in 2015. The stock price seems to be recovering recently. Now, the dividend yield is about 6%+ with Price to book ratio at 0.96. Its NAV is at $1.55. At current price, it is not considered too cheap. I invested in this stock last year December when it was around PB of 0.80. Will not be planning to add more at current price unless it goes down again.

With 62% of its business in Singapore, CDL hTrust will definitely benefit if there was a strong recovery in the hospitality sector here. As at 31 December 2016, its gearing ratio is 36.8% with 61% of its loans on fixed rate. This is quite normal for a trust and aligned to other hospitality companies listed here.

RevPAR for the Singapore hotels has dropped 8.6% in 2016 as compared to 2015 with occupancy rate at 85.4%. Occupancy rate was higher at 87.7% in 2015.

Far East Hospitality Trust

Another stock which has its main business in Singapore is Far East Hospitality Trust. In fact, it has all its hotels in Singapore which is quite concentrated and may pose a risk if Singapore's hospitality industry does not do well.

Some of the hotels they own are Orchard Parade Hotel, Rendezvous Hotel, The Elizabeth Hotel, Village hotel in Changi, Bugis, Albert court and some others. They also have serviced residences called village residences located in Clarke Quay, Hougang, Robertson Quay and also the Regency house.

Rendezvous Hotel owned by Far East Hospitality TrustImage Credit:
For Far East hTrust, we see a similar drop in its stock price in 2015 and it has largely stayed low for the past 2 years plus. It now has a dividend yield of about 7.1% with PB ratio at 0.67. Its NAV is at $0.91. At current price of $0.61, it does still seem attractive to me.

For the hotels segment, RevPAR declined 5.3% in FY 2016 as compared to FY 2015 but however, its occupancy rate actually increased marginally by 1.6pp to 87%. For serviced residences, RevPAU was 5.8% lower and average occupancy decreased 2.0pp to 85%. Overall, it DPS decreased 5.9% in 2016 which still shows continued weakness in their business.

Its gearing ratio is at 32.1% which is not too high and aligned to other companies in the hospitality industry. 71% of its loans are on fixed rate. A large part of its loans has been refinanced to 4 year and 7 year loans which is a good thing.

It is currently doing asset enhancement to its Orchard Parade hotel and also constructing Village hotel in Sentosa which is expected to complete in 2019. I do not own stocks in Far East hTrust currently but will be looking to buy some soon.

Is this a good time to invest in the Hospitality industry in Singapore? 

With hotel supplies in Singapore beginning to taper off in 2018 and visitor arrivals still growing, I would expect occupancy rate to increase and possibly RevPAR to increase as well should it recover. Furthermore, with all the initiatives by the Singapore government, I think there would be a high chance to see some recovery in the hospitality sector next year.

Investing in this sector may take some patience to realise its value. As investors, we want to invest in the companies during bad times to anticipate better times ahead. In the worse case scenario, it may not recover and the wait could be even longer. Most importantly, we will invest when the stocks are undervalued with some margin of safety to manage risk better.

Let's see what happens to this industry in the future.

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  1. Thanks for sharing. i am also looking at the hospitality reits. In mid to long term, the tourist nos will go up with the completion of changi aiport crown jewel project. The near term concern is the Geopolitics. North korea & US tension, Singapore & China relations. Afternote: just to share from Technical analysis: FSTE Real estate investment trust is 768 and near to resistance of 780.

    1. Hi Investminds,

      Thanks for sharing. Hopefully we still see some downside to accumulate more before it moves up.

  2. Was looking at these two REITs as well and was wondering why their DPS were higher than EPS for several years? It left me with some question marks.

    1. Hi Lizardo,

      Let me take a look again. Most importantly the DPS shouldn't be higher than free cash flow in the long run else it'll be unsustainable.

  3. Some are staying at hdb and condos through airbnb. So dont trust the numbers 100%.

    1. Hi,

      True that there is an airbnb factor as well. However, the government has step in to regulate the airbnb for hdb so might be good for the hospitality industry again.

  4. Hi

    Hope you are still active in with this blog.

    I'm really a beginner in terms of investment. But when you mentioned about 8% return in investment, do you mean Dividend Stocks where you get 8% dividend yield? or you mean 8% when you liquid the stocks?