Stock Review: If I were to pick a Hotel Trust

With the ongoing Covid19 pandemic, hotel revenues have been hit hard as travel restrictions have literally stopped all tourism, business travel and convention/exhibition events. Previously, those were the main revenue drivers for hotels and the occupancy rate had been increasing in the past 5 years, maintaining above 85%, which drove more investors to build more hotels over the next few years. When every hotel owner plans based on forward supply growth (based on then-room rates and then-occupany rates), and demand drops, we will be seeing some hotels closing or possible converting to more profitable residential properties like what happened in the past.

Extracted from Far East FY2019 Financial Report Slides - Hotel Supply

Extracted from Far East FY2019 Financial Report Slides - Visitor Arrivals

The main criteria that I will be assessing is the survivality. Basically if the REIT can survive the demand drop and hence price drop, they will have an advantage when the up-cycle restarts.

I browsed the financial reports of these 4 REITS:

1. Ascott Residence Trust (2Q2020, end 30/6)
2. CDL Hospitality Trust (2Q2020, end 30/6)
3. Far East Hospitality Trust (4Q2019, end 31/12)
4. Frasers Hospitality Trust (2Q2020, end 31/3)

1. Net Asset Value (NAV)

NAV is the valuation of all assets in the REIT. For hotels, it's primarily based on how much income the properties can earn. Prices will definitely fall, based on the financial reports from Ascott and CDL,  current prices, it has fallen by at least 50%, for those hotels that are operating. Those that are forced to closed are not part of the statistics. I did not manage to find a copy of Far East's financial report. Only Singapore and Australia are using some of their hotels and serviced apartments as facilities to house people who are entering the country, i.e. Stay-Home-Notice facility. This has provided Ascott and CDL with some reprieve.

Extracted from respective financial reports

I compiled the highest and lowest prices in the last 52 weeks. Only Ascott did not fall below 50% of its NAV, and was trading at the highest P/B ratio, 55% of NAV (52 week low) and 73% of NAV (current) which shows more investor confidence in Ascott. Far East was the lowest at 41% of NAV (52 week low) and 57% of NAV (current).

2. Debt

The most risky part of a REIT is its debt. It is only profitable if they can maintain low interest rates, hence REITs have been merging increase their size so that they have better economies of scale to reduce management and financing costs. The main things I look for are average interest rates and off-balance sheet debt. The interest rates the REIT gets from the bank reflects the bank's risk appetite for their assets, i.e. the higher the rate, the less "faith" the bank has, and they have to source other financing (like corporate bonds). In this aspect, Ascott has the lowest interest rate of 1.8%.

Next is off-balance sheet debt in the form of Perpetual Securities (Perps). It's off-balance sheet because it's not shown on the balance sheet -- you have to scroll to the table that records it to see how much there is, and then manually calculate the debt/asset ratio because the debt/asset ratio that the REITs report excludes these debt.

Extract from Ascott - Statement of Movement in Stapled Securityholders Funds

Ascott has $396M of Perps and Fraser has $100M. CDL and Far East did not record any in their financial reports. I recalculated the debt % with the Perps added in. Ascott is no longer the lowest after that.

Extracted from respective financial reports - debt %

CDL is a little bit less indebted than Ascott. Ascott and CDL published their Fitch Ratings BBB and BBB- respectively.

Far East and Fraser are paying about 1% more in interests. They did not publish any ratings. Not getting themselves rated doesn't mean that they are bad too. However, Fraser Centerpoint Trust published their BBB rating.

3. Dividends

Normally, it will be a factor, however there is nothing to evaluate now because hotels are not in business.

Extracted from respective financial reports - dividends

Ascott and Fraser are positive mainly because they have serviced apartments that bring in income. CDL is negative.

Extracted from respective financial reports - profit

Based on the P/B and debt, I prefer CDL Hospitality Trust, but I also feel that I need more margin of safety because income is near 0 or even negative for the coming months. Hence I will only enter at 40% of NAV or $0.59. Tourism is unlikely to return to full scale immediately. SIA had also provided guidance that they are planning for recovery to be at max 50% of previous capacity, With half the visitors, room rates will likely fall by half, especially those at non-prime locations.

The writer does not own any of the stocks mentioned.