Ascendas Hospitality Trust - An Opportunity To Invest Again

Share prices of various stocks have come down significantly in the past few weeks and this include Ascendas Hospitality Trust (AHT). This has been one of my favourite hospitality trust investment which I bought back in 2014. It has been a 4 years investment now. AHT made some significant developments in the past 1 year which they have summarised in their recent AGM last friday. I wanted to make a trip down but was too busy at work so I couldn't take time off for this AGM. Nevertheless, I managed to get the slides presented during the AGM which gives quite good information on the developments over the past 1 year.

I believe AHT share price of below $0.80 presents a good opportunity to invest in a hospitality trust with stable dividend yield of more than 7%. Let's discuss in detail on why is this so.

Park Hotel Clarke Quay in Singapore owned by AHT

Brief introduction to AHT

AHT has 10 hotels located in Australia, Japan, Korea and Singapore. In terms of portfolio valuation, Australia makes up 38.7%, Japan at 38%, Singapore at 18.1% and South Korea at 5.3%. In its opening address during the AGM, they mention specifically 3 highlights:

1. Divested Beijing Hotels for 2.0x valuation
2. Effective interest rate significantly lower at 2.7%
3. 3.2% DPS y-0-y improvement

Earlier this year, AHT did divest away their 2 Beijing hotels at much higher valuation. It was the talk of the town as its share price shot up because investors believed that its Net Asset Value is much higher than what they have put in their balance sheet. However, this was short lived when its Australia properties did not do as well and what made it worse was Australia hotels collectively made up the largest contribution to its DPU. Its Australia net property income declined -6.4% in FY2017/18 as compared to FY2016/17.

Its other hotels in Singapore and China did relatively well and Japan 's hotel was unchanged with a slight decrease. Overall, DPU increased 3.2% mainly due to savings in finance cost  and look fee received in connection to the divestment of Beijing hotels.  

One thing to note is that I can see REVPAR is increasing for all its hotels in all countries including Australia. This is an encouraging sign. Its Australia's hotel in Sydney still performed well. One of its Sydney's hotel was also undergoing renovation so this affected DPU in the past 1 year. Moving forward, DPU should continue to be good as the renovation is already done. 

*To understand why REVPAR is important, you can read this article here

Healthy Balance Sheet 

AHT's gearing is at 30.8% which is a decrease from the previous 32.2% after it divested its Beijing hotels. One significant thing to note is that its effective interest rate came down to 2.7% from the previous 3.1%. This is an important factor in this rising interest rate environment which I wrote in another article here. 

Net Asset Value remains stable at $0.92. This means that the current price of AHT at $0.79 is trading at a discount. For its debt profile, 77.2% is on fixed rate while 22.8% is on floating rate. Most of its debt are in AUD and JPY which is not that affected by interest rate movement so far. Japan still has one of the lowest interest rates in the world currently. It might be interesting to note that Japan's key short term interest rate is actually at -0.1% as at June 2018. 

Hotel Acquisition for Growth

After its divestment of its Beijing hotels, AHT continues to pursue growth opportunities by acquiring DPU accretive hotels. It made its maiden entry into Seoul, South Korea by acquiring a hotel that is strategically located in the prominent Dongdaemun area. The acquisition is DPS accretive by 1.7% on pro forma FY2017/18 basis. This is a midscale hotel which was completed in 2015 and it is freehold. 

Separately, it also purchased 3 other hotels in Osaka which is DPS accretive by 4.3% on pro forma FY2017/18 basis. Osaka is a key financial centre both in Japan and globally and also a popular leisure destination. International visitors arrivals in Osaka reached 11.1 million in 2017 and has a CAGR of 43% over the past 5 years. Overnight stays in Osaka also grew by 8% on average, every year for the past 5 years. 

I believe Ascendas Hospitality Trust will continue to grow both in terms of portfolio valuation and also in terms of DPU. A stock price of below $0.80 represents a good 7%+ yield as well as trading below its book value. I will be looking to add more to this investment if it comes down to below $0.75. My last purchase price was at $0.72 and this represents a 8.1% yield which I have been getting for the past 4 years.

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Investing In The Hospitality Industry - Breakdown of Individual Hotels Revenue

Its earnings season again. I've received a couple of annual reports as many companies have just closed their financial year to wrap up FY2017. I'm particularly interested in the results of the hospitality trusts which I own as 2018 is suppose to be the year where we should see some great recovery for this sector.

Most of the annual reports are now in a booklet format which saves a lot of cost for the companies as well as the environment. I have to go online or use the CD to view the annual reports. 2 hospitality trusts which I own are CDL Htrust and Far East Htrust.

In this post, I will deconstruct and dive down into the performance of individual hotels which they own which I believe will give us a better picture of the outlook of the hospitality sector in Singapore as well in other countries.

CDL Hospitality Trust - 20 Properties in 7 Countries

CDL Htrust has done well over the years not because its Singapore hotels have done well but because of the stellar performance of some hotels overseas. Let's take a look at the gross revenue breakdown of each hotel:

Hotels	Gross Revenue FY16 S$'000	Gross Revenue FY17 S$'000	Variance $	Variance %
Singapore	89,265	89,037	-228	-0.3%
Orchard Hotel	21,707	20,712	-995	-4.6%
Grand Copthorne Waterfront Hotel	18,117	18,948	831	4.6%
M Hotel	13,741	13,572	-169	-1.2%
Copthorne King's Hotel	7,733	7,237	-496	-6.4%
Studio M Hote	7,047	6,875	-172	-2.4%
Novotel Singapore Clarke Quay	20,920	21,693	773	3.7%
Australia	14,438	14,466	28	0.2%
Mercure Brisbane	2,570	2,576	6	0.2%
Ibis Brisbane	1,714	1,717	3	0.2%
Novotel Brisbane	5,217	5,227	10	0.2%
Ibis Perth	1,956	1,960	4	0.2%
Mercure Perth	2,981	2,987	6	0.2%
New Zealand
Grand Millennium Auckland	13,274	19,419	6,145	46.3%
Maldives
Angsana Velavaru	8,304	8,289	-15	-0.2%
Dhevanafushi Maldives Luxury Resort	17,481	14,587	-2,894	-16.6%
Germany
Pullman Hotel Munich	-	5,468	5,468	100%
Japan
Hotel MyStays Asakusabashi	5,994	5,701	-293	-4.9%
Hotel MyStays Kamata	4,578	4,144	-434	-9.5%
United Kingdom
Hilton Cambridge City Centre	21,418	20,344	-1,074	-5.0%
The Lowry Hotel	-	16,053	16,053	100%

As we can see, most of CDL Htrust's income comes from Singapore. It makes up about 56.8% of its net property income. The Singapore hotels performance largely remained flat with Orchard hotel as its main contributor of income. The boost comes mainly from its one and only New Zealand hotel which contributed $6 Million more to its revenue in FY17.


Far East Hospitality Trust - 8 Hotels, 4 Serviced Residences

Far East Htrust is a pure Singapore hospitality investment. All its properties are located in Singapore which has not been doing well for the past few years. Similarly, 2018 should be the year of recovery for the hotels in Singapore as the hotel supply tapers off this year.  Let's take a look at the gross revenue breakdown of each hotel:

Hotels	Gross Revenue FY16 (S$Million)	Gross Revenue FY17 (S$Million)	Variance $	Variance %
Village Hotel Albert Court	5.7	5.9	0.2	3.5%
Village Hotel Bugis	11.5	11.2	-0.3	-2.6%
Village Hotel Changi	10	9.5	-0.5	-5.0%
The Elizabeth Hotel	6.9	6.3	-0.6	-8.7%
Oasia Hotel Novena	14.3	13.1	-1.2	-8.4%
Orchard Parade Hotel	20.6	20.3	-0.3	-1.5%
The Quincy Hotel	3.4	3.4	0.0	0.0%
Rendezvous Hotel Singapore	13.5	12.4	-1.1	-8.1%
Serviced Residences
Village Residence Clarke Quay	9.2	8.9	-0.3	-3.3%
Village Residence Hougang	2.9	2.2	-0.7	-24.1%
Village Residence Robertson Quay	4.9	4.4	-0.5	-10.2%
Regency House	6.2	6.2	0.0	0.0%

2017 was a tough year for Far East Htrust. Both its hotels and serviced residences properties suffered a drop in gross revenue. In 2018, it will have a new addition to its portfolio which is Oasia downtown hotel where they acquired just recently. Another hotel, The Outpost hotel at Sentosa will also be opened in the second half of 2018. These 2 hotels are expected to boost its income for FY2018.

Artist impression of the outpost hotel, Sentosa

The hospitality sector is very much affected by the demand and supply of rooms. Tourist arrival is expected to be strong in Singapore increasing by about 4% in 2018. Supply of rooms will be low in 2018 as compared to 2017. Globally, the economy is on track for a recovery and this should benefit tourism as a whole. As corporate demand increases, serviced residences should be in demand as well. Let's see what happens in 2018 for the hospitality sector. I continue to be vested in this sector.

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Is 2018 The Year To Invest In Hospitality REITs?

It is expected that the hospitality sector will recover in 2018 due to the lower supply of hotels in Singapore. Elsewhere in the world, the better economic outlook is also expected to improve tourism receipts which will benefit the hospitality sector also.

The question is, on the back of all these positive sentiments, is there still opportunities to invest in the hospitality sector? I am always weary when we see a lot of good news for a particular sector because most of the time, the stocks would have already run up. This is the case for the hospitality sector currently where many brokerage houses and analyst are very bullish on this sector. 

Yes, many stocks in the hospitality sector have already run up since last year. The stocks which are listed in Singapore and in the hospitality sector are as follow:

1. Ascendas Hospitality Trust
2. CDL Hospitality Trust
3. Far East Hospitality Trust
4. Frasers Hospitality Trust
5. OUE Hospitality Trust

I have invested in all the above hospitality trust except for OUE Htrust which I am not vested in. I have recently bought into Frasers Htrust as it is at fair value with stable and relatively high DPU at about 6.4%. Its hotels are also located strategically around the world so I believe they will benefit from the improved tourism moving forward. In its latest 1Q FY18 financial results, Frasers Htrust reported higher revenue for all countries except for its UK hotels.

Another opportunity to invest in the hospitality sector is Far East Htrust. This is a stock I invested back in May last year at a lower price. But, at current price, I still believe it still has some good value for those who want to invest in it. They have recently acquired Oasia Hotel Downtown which is strategically located in the heart of CBD just beside Tanjong Pagar MRT. This would have boosted DPU by 4% for 9MFY2017 results on a pro forma basis. Oasia Hotel has good reviews on Tripadvisor as well as Booking.com and its a choice of stay for travellers coming to Singapore. We should expect RevPAR to improve with the addition of this new hotel into their portfolio for FY2018 when its approved by the shareholders in March 2018.

However, we have to note that their latest financial results didn't really show much improvements for their current portfolio. Their average occupancy for the hotel portfolio is only 85.4% and RevPAR declined 2.4% year on year to $132. For the serviced residences, average occupancy is only at 78.2% and RevPAU decreased 5.5% to $166. I do not know clearly if its occupancy or RevPAR will improve in 2018 even though the general sentiment is that hotels should do well in 2018 onwards.

Far East Htrust still gives good dividends at around 5.45% at the price of $0.715. It is trading at 0.8x PB which is still at a discount to its book value. All the other stocks in the hospitality sector are trading at much higher book value with CDL Htrust at 1.09x PB, Ascendas Htrust at 0.99x PB and OUE Htrust at 1.09x PB. If some of these hospitality stocks continue their decline due to the volatility of the market, I will consider accumulating some along the way.

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Far East Hospitality Trust 2Q 2017 Financial Results - Review & Action

Far East Hospitality Trust just released their financial results last Friday and I thought it would be good to do a quick update since I've been writing a lot on the hospitality industry as an investment opportunity.

Net property income still decreased by -6% in 2Q 2017 as compared to 2Q 2016. However, this is a smaller decrease compared to the 1Q decrease of -10.4%. Average hotel occupancy was 87.1% in 2Q as compared to 88.1% in 1Q. Comparing year on year, occupancy increased 1.9%. RevPAR remains stable at $134 which is a good sign that it has bottomed out. Comparing year on year, RevPAR decreased -4.6% in 1Q while it decreased -1.3% in 2Q. This is a smaller decrease which is again a good sign that RevPAR is bottoming.

Credit: http://www.fareasthospitalitytrust.com/rendezvous-hotel-singapore.html

In summary, hotel occupancy has increased by 1% for the 1H of 2017 while serviced residence has decreased by -8.7%. RevPAR still remains low but shows signs of bottoming out. Far East Htrust portfolio consists of 64.8% hotels, 12.9% serviced residences and 22.3% commercial which contributes to its gross revenue. From the time I invested in this stock, the stock price has gone up by 10% and I've divested a portion of my investment in this stock at 0.67. It is still trading at a PB of 0.74 which represents a discount to NAV of 26%. The dividend yield at current price is about 6.24%. The reason for divesting it is to lock in some gains first while monitoring it for any other upside.

I also did a check on one of its competitors, Frasers Hospitality Trust and looked at its Singapore properties portfolio. I noticed that Frasers Htrust Singapore properties registered a higher RevPAR for both its properties. It is an impressive gain of 4.1% Y-Y.  For all its other countries portfolio, the gross operating profit also increased. Frasers Htrust will be the next investment opportunity I'll be looking at. However, it's trading at a PB of 0.99 and dividend yield of 6.53%. It seems to be at a fair price currently so if we want to invest now, there may be limited upside. I shall monitor and keep it in my watchlist for any good entry points.

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CDL Hospitality Trust - Is Hospitality Industry Recovering?

Previously I blog about the hospitality industry and why I think that it may be the next investment opportunity. You can read the post here. CDL Hospitality Trust is one of the hospitality trust stocks which I own and recently it reported its Q1 financial results. Looking at its results, we can know whether the hospitality industry is still on the track to recovery. 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.

Hotel Lobby of Grand Millennium Auckland in New Zealand

The hospitality industry, especially in Singapore has suffered quite a bit in recent years due to the poor economic conditions globally. Overall, the hotels revenue per available room (RevPAR) in Singapore has declined to as low as during the global financial crisis in 2007. This has caused the earnings of the companies in this industry to suffer.

For CDL hTrust, net property income (NPI) went up 6.4% in Q1 2017 as compared to Q1 2016. This resulted in the DPS going up 9% YoY. The increase was mainly due to higher contribution from its New Zealand hotel which was up 90.2%. For Singapore, NPI increase marginally by 1.5% only. CDL hTrust has most of its hotels (69.1%) in Singapore so the focus is still in this market.

Performance of Singapore Market

CDL hTrust Singapore hotels' occupancy rate went up from 83.9% in Q1 2016 to 88.4% in Q1 2017 which is a 4.5pp increase. However, RevPAR still declined but only marginally by -0.8%. This is a huge improvement from the -6.9% decline in Q1 2016 vs Q1 2015. It seems like the decline has slowed down and bottomed out.

For the macro conditions of the hospitality industry, STB estimates moderate growth in visitor arrivals of 2% and YTD February 2017 visitors arrival grew by 3.4% yoy with China visitors at the highest. Additionally, a S$34 million investment was recently announced by STB, SIA and Changi Airport Group to strengthen Singapore’s destination appeal and woo business and MICE visitors. This is on top of the other initiatives which I've listed out in my previous blog post.

As mentioned in previous blog post, we can expect hotel supply to gradually taper off in 2018 which we should see a stronger recovery in the RevPAR. CDL hTrust price went up to $1.55 with Price to Book ratio of 0.98. This is at fair value and not too cheap in my opinion. I bought this stock back when it was at PB of around 0.8. Nevertheless, the current yield is about 6.45% which isn't really too attractive for me. A dividend yield of more than 7% would be more attractive for hospitality stocks. I would accumulate more if there are any opportunities to buy a lower prices.

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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?

GRAND COPTHORNE WATERFRONT HOTEL

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: https://www.tripadvisor.com.sg/Hotel_Review-g294265-d299606-Reviews-Rendezvous_Hotel_Singapore_by_Far_East_Hospitality-Singapore.html

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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