Broker's Take: DBS says Singapore hotel Reits now attractive privatisation targets

DBS Group Research on Monday said that hotel Singapore real estate investment trusts (S-Reits) are now trading below replacement cost, and serve as "attractive privatisation candidates".

"The four hospitality-focused S-Reits have borne the brunt of the sell-off from the Covid-19 outbreak since late-February and are now trading at 0.5-0.6 times price to net asset value, at -2 standard deviation of their 10-year mean," wrote DBS analyst Derek Tan in a research note.

The four Reits are CDL Hospitality Trusts (CDLHT), Ascott Residence Trust (ART), Far East Hospitality Trust (FEHT) and Frasers Hospitality Trust (FHT).

"On an enterprise value per room basis, we found all four S-Reits trade at an implied valuation per room of S$0.5 million to S$1.2 million per room, with CDLHT and FEHT the lowest at less than S$0.6 million per room. This is even cheaper than recently transacted land costs for hotel sites in recent years," DBS noted.

The research team is of the view that if these hotel S-Reits continue to trade at "such low valuations", their sponsors may consider taking them private, given that most have not been active in raising capital and/or recycling assets.

DBS has upgraded its calls on FEHT and FHT to "buy", while revising its target price on the counters to S$0.60 and S$0.65 respectively.

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"Among the four hotel S-Reits, FHT and FEHT could be attractive privatisation candidates as they have been least active in tapping capital since listing," DBS said.

The research team estimated that it will cost sponsors about S$450 million to S$600 million to buy out the minorities, assuming a 25 per cent premium to current price.

"While the amount may sound hefty in the current climate, this compares favourably to the S$562 million paid for the hotel site in Club Street in Singapore in January 2019. The sponsors of FHT and FEHT will then gain control of a diversified portfolio of 3,000 rooms (FEHT) and 4,000 rooms (FHT), which will return higher when operating conditions improve," it said.

Overall, DBS noted that it has adjusted its portfolio valuation estimates across the hospitality S-Reits sector to factor in a sharp decline in global travel demand in its forecast for fiscal year 2020. That said, the research team expects a "swift recovery" when the global lockdown ends, and forecasts earnings normalisation will take place from fiscal year 2021.

ART remains DBS's pick to leverage on the global recovery. The research team has a "buy" recommendation and a target price of S$1.10 on the counter.

"Despite current portfolio weakness across ART's global diversified portfolio due to Covid-19, we remain confident as ART's medium-term catalysts remain intact," DBS said.

It added that short-term cash buffers are also in place from accumulated divestment gains, estimated at some S$160 million. With depressed hotel valuations and a debt headroom of about S$1.5 billion, acquisition growth is also possible at ART, the bank noted.

As at 11.55am on Tuesday, units in ART were trading at 85 Singapore cents, down 3.5 cents or 4 per cent, units in FEHT were trading at 47.5 Singapore cents, down 1.5 cents or 3.1 per cent, while units in FHT were trading at 48.5 Singapore cents, down 1.5 cents or 3 per cent.