Since late last year, international tourists have been returning to our tiny red dot and arrivals are continuing to grow. According to Singapore Tourism Board, Singapore attracted 9.2 million visitors to our shores in 1H18, up 7.6 percent from a year ago.

The hotel sector benefitted from the return of tourists, with hotel room revenue rising nine percent to hit almost $2 billion. Revenue per available room (RevPAR) also recorded almost four percent rise to $187 as a result of higher average room and occupancy rate. As a whole, the sector saw average room rate (ARR) climb 2.2 percent to $218 while average occupancy rate rose 1.6 percent to 85.5 percent.

Operating environment looks set to improve as hotel assets oversupply tapers off. According to industry data, the supply pipeline is expected to grow 2.5 percent this year, 0.8 percent next year and 0.6 percent in 2020. In a tightening demand-supply environment, we look to the subsector of hospitality REITs to ride on the recovery of our tourism industry.

Far East Hospitality Trust 

Far East Hospitality Trust (FEHT) is a pure play Singapore-focused hospitality trust. With 13 mid-to-upscale hotels and serviced residences, boasting 3143 hotel rooms and apartment units, some of FEHT’s prominent assets are the iconic Rendezvous Hotel at Bugis and Village Hotel Albert Court.

Given that economy hotels posted the highest jump in RevPAR while luxury hotels saw the smallest growth, FEHT’s more budget friendly assets have higher sensitivity to benefit from this trend. Meanwhile, FEHT’s 2Q18 occupancy rate continued to recover, rising from 89.6 percent to 89.8 percent since first quarter.

After acquiring upscale Oasia Downtown Hotel at Tanjong Pagar in 2Q18, fully by debt, FEHT’s gearing rose to 40.3 percent. This leaves little debt headroom for the trust to undertake more acquisitions in the near-term, though it should be noted that Oasia Downtown Hotel was a yield-accretive purchase.

That said, near-term growth of FEHT will likely be supported by any asset enhancement initiative (AEI). In 1Q18, FEHT completed phase 3 AEI for Orchard Parade Hotel, giving it a much-needed facelift, and we should begin to see better contribution from the property. In the pipeline, 3 new hotels under development in Sentosa are also near-term catalysts for FEHT. The joint-venture developments see FEHT chalking up a 30-percent stake with Far East Organisation.

Currently, FEHT is trading at a discount to its price-to-book value at 0.73 times. Based on its trailing 12-month distribution of $0.0395 per unit, FEHT offers an indicative yield of 6.2 percent.

Frasers Hospitality Trust 

Since its IPO in 2014, Frasers Hospitality Trust (FHT) has been steadily growing its asset base. From an initial portfolio of six hotels and six serviced residences, FHT portfolio has expanded to nine hotels and six serviced residences in global gateway cities in a matter of four years.

By geography, FHT has a significant exposure to Singapore’s hospitality sector with contributions coming in at 19 percent by gross revenue in 3Q18. Australia’s contribution makes up 42 percent, while UK and Japan accounted for 18 percent and 14 percent respectively.

FHT has two hospitality properties in Singapore: InterContinental Singapore and Fraser Suites Singapore. In 3Q18, due to Fraser Suites pursuing a volume strategy, average RevPAR declined 2 percent from $248 to $243 as ARR fell 5.4 percent to $279. On the positive note, average occupancy improved significantly for the Singapore portfolio from 84.3 percent to 86.9 percent.

That said, revenue from FHT’s ANA Crowne Plaza Kobe in Japan should be impacted in upcoming 4Q18 results as many tourists cancelled or diverted flights away after a back-to-back occurrence of an earthquake and Typhoon Jebi.

Meanwhile, weakness in property prices in Sydney could also weigh on three out of four of FHT’s Australia’s properties. Additionally, a large supply pipeline of hotel rooms in Melbourne and Sydney could further weigh on room rate growth. On the other hand, weakness in the Sterling Pound could continue to support tourists growth in UK but FHT has cautioned of inbound tourists “fizzling out”.

In the near term, FHT’s financial performance could continue to be lackluster. However, with total debt-to-assets at 34 percent, FHT still has debt headroom of roughly $278 million that it could use to fund acquisitions. Based on its current share price of $0.675, indicative yield for FHT is 7.1 percent and the trust is trading at 0.87 times or 13 percent discount to its price-to-book value.

CDL Hospitality Trusts

CDLHT is another diversified play with a major exposure to Singapore’s hospitality sector. By valuation, its seven local hotels account for 63.9 percent of its portfolio. Meanwhile, other overseas assets are not concentrated within a single country (below 13 percent). This makes CDLHT to be highly geared towards the local hotel sector’s recovery.

In the latest 2Q18, occupancy rate of CDLHT declined from 87.6 percent in 1Q18 to 85.5 percent. However, given the trend that travellers are increasingly looking for budget and economy hotels, CDLHT’s Singapore portfolio is likely to benefit more compared to the FEHT and FHT.

CDLHT’s Singapore assets are mostly situated in “hippy” Clarke Quay district that caters to more budget-friendly travellers. In addition, its hotels are also larger in size and fitted with conventional halls that could target the niche MICE (Meetings Industry) market.

In 1H18, financial performance was dampened by weak demand from MICE market due to the high-profile Trump-Kim summit. As such, CDLHT could experience a ramp up in corporate demand as major events and conventions recommence in 2H18.

Meanwhile, CDLHT’s Orchard Hotel is currently undergoing AEI. For Orchard Hotel, refurbishment of the lobby and F&B outlets are expected to be completed by end-2018. Hence some disruption and revenue loss are within anticipation in the short-term.

Nonetheless, CDLHT also has ample debt headroom for acquisition purposes with gearing sitting at 33.3 percent as of 1H18. Based on its current share price of $1.55, its indicative yield is around 6 percent and is changing hands at around its book value.