The Travel Recovery is Here: Will Hospitality Trusts Raise Their DPUs Further?

There is good news all around as airlines ramp up their itineraries with more people flying overseas for holidays.

The pent-up demand for travel has led to a surge in bookings for everything from cruises to flights.

Singapore Airlines Limited (SGX: C6L) welcomed close to three million passengers on its flights in August, up 43.5% year on year.

Back in April, Singapore saw tourist arrivals surpass the one million mark for two straight months and set a post-pandemic record.

Another beneficiary of this travel boom is the hospitality trust sector.

With more tourists flocking to Singapore and the region, these trusts are also enjoying a breath of fresh air after enduring nearly three years of hardship.

Could this REIT subsector provide income investors with higher distributions?

A flurry of good news

Hospitality trusts have posted encouraging sets of financial results as they enjoy a reprieve from the difficult conditions faced when air travel shut down.

The largest hospitality trust by market capitalisation, CapitaLand Ascott Trust (SGX: HMN), or CLAS, posted a 30% year on year jump in revenue to S$346.9 million for the first half of 2023 (1H 2023).

Its distribution per stapled security (DPSS) climbed 19% year on year to S$0.0278.

For 1H 2023, CDL Hospitality Trusts (SGX: J85), or CDLHT, also saw its revenue and net property income (NPI) rise 20.9% and 23.3% year-on-year, respectively, to S$119.2 million and S$62.9 million.

DPSS leapt 23% year on year to S$0.0251.

As for Far East Hospitality Trust (SGX: Q5T), or FEHT, gross revenue for 1H 2023 climbed 26.9% year on year to S$52 million while NPI improved by 30.7% year on year to S$49 million.

DPSS increased by 24.7% year on year to S$0.0192.

All three hospitality trusts also saw improvements in their operating metrics.

CDLHT’s revenue per available room (RevPAR) for 1H 2023 increased year-on-year in six out of eight countries.

CLAS reported a portfolio revenue per available unit (RevPAU) increase of 44% from the prior year during the same period.

As for FEHT, RevPAR nearly doubled year-on-year to S$133 for 1H 2023.

These trusts capture the period 1 January to 30 June 2023 when economies reopened and people rushed to book holidays.

Looking ahead, there could be several headwinds for the hospitality trust sector.

High airfares may crimp demand

With the jump in demand for air travel, many airlines have lifted ticket prices to fully capitalise on this surge.

While airlines maintain that these higher fares are a result of the lack of capacity coupled with higher fuel costs and inflation, there may be a limit as to what consumers can bear.

High airfares may persist until 2025 as many airlines slowly ramp up their capacity.

The persistently high airfares could crimp demand for air travel as consumers baulk at paying continued high prices.

Investors should also note that after the initial surge arising from pent-up demand, air travel may start to normalise back to pre-pandemic levels.

A lack of manpower for tour agencies

Tourist arrivals in Singapore may be creeping back towards pre-pandemic levels, but another problem has emerged for the sector.

Many tour agencies find themselves struggling to cope with the influx due to a lack of tour buses and drivers.

The pandemic caused many agencies to sell off a portion of their vehicle fleets to reduce costs and raise cash.

Expanding the fleet now requires both time and significant resources as vehicles also cost more now.

There is also a problem with finding qualified drivers as many took up other jobs to tide through the pandemic and switched to other industries.

This manpower constraint means that tour agencies may be forced to accept lower bookings so that they can cope, thereby limiting the number of tourists that can visit Singapore.

Hospitality trusts may see tourist bookings plateau as tour agencies try to resolve these issues.

Macroeconomic headwinds

On the macroeconomic front, things are also not looking good.

The US Federal Reserve is committed to keeping interest rates higher for longer to bring inflation down to the targeted 2% level.

In the range of 5.25% to 5.5%, interest rates are now hovering at their highest level in 22 years.

Consumer demand should remain muted as these high rates work their way through the economy.

These high rates, coupled with a sharp increase in the prices of goods and services, will dampen spending in the months ahead.

Singapore is also witnessing an uneven aviation recovery compared to peers such as Japan, India, and South Korea.

For the October to December 2023 period and based on booking trends, travel into Singapore was still 28% below pre-pandemic levels whereas the three countries mentioned above have seen tourism surge higher than pre-pandemic levels.

Get Smart: DPSS growth should moderate

Based on the factors above, hospitality trusts could see muted DPSS growth.

Investors should closely monitor business conditions and air travel trends to determine if these REITs could enjoy better days ahead.

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

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