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Where Is The Value In The Hotel & Resort REITs Sector?

Real Estate Investment Trusts (REITs) allow smaller investors to directly share in the higher returns generated by properties. That’s because REITs have to pay out at least 90% of their income to unit holders. In return REITs receive favourable tax breaks. The fact that they have to pay out such a large percentage of their income generally translates into higher yields than the overall market.

The five REITs that are focussed on Hotel and Resorts are no exception. Excluding Frasers Hospitality Trust (SGX: ACV), which has yet to pay a dividend since its July listing, the average yield on offer is over 7%. This is significantly above the market average and nearly three times the risk free rate of return.

Focusing on the other four REITs, Ascendas Hospitality Trust (SGX: Q1P) boasts the best yield, which is currently around 7.9%. With a market capitalisation of around S$800m, Ascendas is the smallest of the five REITs and is available to investors at its book value.

None of the five companies are priced significantly above their book values. In fact, only CDL Hospitality Trust (SGX: J85) and Frasers trade at a premium. But even these are only valued at a 10% premium. Only Far East Hospitality Trust (SGX: Q5T) trades below its book value, offering investors a 20% margin of safety.

Far East Hospitality Trust, in common with OUE Hospitality Trust (SGX: SK7), operates a portfolio of properties located only in Singapore. The company, which is capitalised at S$1.4b, owns eight hotels and four serviced residences.

In terms of their Price-to-Book ratios and the dividend yields on offer, it can be argued that all the REITs, excluding Frasers, are value shares. However, the Price-to-Earnings ratios could suggest otherwise.

The average earnings multiple of the five companies stand at a surprisingly high 33. That is more than twice the market average. This suggests that the companies could be too expensive relative to their earnings when compared against the rest of the market.

Whether you see these REITs as value investments depends on how willing you are to overlook their inflated earnings multiples. Some investors might accept that REITs are inherently different. Others, in particular value investors, could argue otherwise.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Adam Kuo doesn’t own shares in any companies mentioned.