Singapore Hospitality REITs Stand to Benefit from Budget 2020

Hospitality Trusts suffering lower occupancy due to the Covid-19 outbreak will soon get some relief from the Singapore Government.

Budget 2020 is granting a 30% rebate for the accommodation and function room components for licensed hotels and serviced apartments.

The reason, I believe, for the very generous rebate was because hotels are a segment that had been one of the most severely hit by the numerous travel curbs and restrictions imposed by governments around the world.

Already, a number of hospitality REITs are reporting lower distributions as revenues come under pressure.

Hospitality REITs’ Latest Results

Among the four most prominent hospitality REITs are Ascott Residence Trust (SGX: HMN), or ART, CDL Hospitality Trust (SGX: J85), or CDLHT, Frasers Hospitality Trust (SGX: ACV), or FHT, and Far East Hospitality Trust (SGX: Q5T), or FEHT.

For ART, its revenue remained flat year-on-year for 2019, while distribution per unit (DPU) also stayed constant at S$0.064 per share.

Meanwhile, CDLHT’s revenue dipped 2.4% year-on-year for 2019, while DPU declined by 2.6% year-on-year to S$0.0902 after adjusting for retention sums.

Elsewhere, FHT’s gross revenue for the first quarter for fiscal 2020 (ended 31 December 2019) was up 4.3% year-on-year, while DPU improved by 7.3% year-on-year to S$0.013301.

Finally, FEHT’s gross revenue was up marginally at 1.6% year-on-year, but DPU dropped by 4.8% year-on-year to S$0.0381.

Of the four hospitality REITs, three have witnessed an average decline in DPU year-on-year.

It could get worse.

Business could be further impacted from January 2020 onwards as the Covid-19 outbreak steadily worsened, and may not be reflected in the REITs’ latest results.

Some hospitality trusts may be impacted more than the rest.

The extent of impact for each REIT

The proportion of Singapore assets as a percentage of total assets or the proportion of revenue or net property income (NPI) arising from Singapore can give us a clue to the magnitude of the Covid-19 impact.

For ART, it had total assets of S$7.4 billion as of 31 December 2019, of which around 17.4% are located in Singapore. The REIT has only four hotels located in Singapore out of its portfolio of 87 hotels, with an additional one under development (lyf one-north Singapore).

CDLHT’s property valuation as at end-2019 was S$2.85 billion, of which 64.5% was located in Singapore. The bulk (62.3%) of its NPI for 2019 came from Singapore.

For FHT’s first quarter of fiscal 2020, Singapore contributed around 19% of gross revenue and 20% of NPI. Lastly, for FEHT, its total portfolio of 13 properties valued at S$2.65 billion are all located in Singapore.

How the rebate will help

FEHT is thus the most exposed to the negative effects arising from the plunge in tourism due to Covid-19.

Next in line is CDLHT with close to two-thirds of its portfolio located in Singapore. ART and FHT have around one-fifth of their portfolio exposed to Singapore, so are not as badly affected as either FEHT or CDLHT.

With the 30% property tax rebate, the four hospitality REITs’ Singapore hotels will enjoy substantial tax savings, which could cascade through to NPI and lead to offset some of the impact from the coronavirus.

This rebate will help to cushion the impact from Covid-19, though it may not be enough to fully offset its negative effects.

FEHT and CDLHT will thus benefit the most from this one-off tax rebate, but ART and FHT will also be able to enjoy some level of savings that go a long way towards mitigating the adverse impact from the drop in visitor numbers.

Recovery may be protracted

Moving forward, the recovery may be slow as the Covid-19 situation has yet to be satisfactorily resolved. The effects may be felt for many more months and the REITs may continue to suffer from a decline in both gross revenue and NPI.

The government has pledged to provide more assistance to affected sectors if need be through off-budget measures, so unitholders of these REITs should brace themselves for a tough year, but also remain optimistic that things will improve significantly once tourism rebounds off the lows.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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