In Singapore, there are 31 real estate investment trusts (REIT) and property trusts. Of these, six are REITs that focus on hospitality businesses. Said another way, these are REITs that own and operate hospitality properties such as hotels and serviced apartments.
To pick the best hospitality REIT, we might want to start with the key factors that influence the hospitality sector. Here are three of them which I have picked up from my own study of REITs.
1. Volatility in the hospitality business
Source: Singapore Tourism Board
Historically, the business of hospitality has been volatile.
As shown above, factors like tourist arrivals can cause the hotel RevPAR (revenue per available room) to vary from year to year. This in turn may affect a hotel’s ability to generate revenue for a hospitality REIT.
On the other hand, it is noteworthy that trusts like CDL Hospitality Trusts (SGX: J85) derives its revenue from leasing hotel properties to hotel managers. Under the terms of its lease agreement (which differs by property), there is a fixed level of revenue to CDL Hospitality Trusts as well as a variable revenue component. This lease structure helps the trust tide over rough patches in its business.
Below is an example of the lease structure for CDL Hospitality Trusts’ Singapore hotels. You can learn more about the trust in here and here. The trick may be to figure out how much of the distribution per unit of the trust is covered from the fixed revenue component of its lease arrangements.
Source: CDL Hospitality’s Earnings Presentation
2. Supply and demand of hotel properties
Foolish investors may have also noted from the first graph above that tourist arrivals has seen relatively steady growth since 2010. That’s a positive for the demand side of things.
On the flipside, the supply of hotel properties is another factor to consider.
In its latest earnings release, Frasers Hospitality Trust (SGX: ACV) cited a report that 60,000 rooms will be supplied to the Singapore hotel market by the end of 2015. On balance, Frasers Hospitality Trust expects the nett effect of the supply and demand to result in stable occupancy.
Having said that, Singapore’s tourism sector is not the only game in town.
For instance, Ascendas Hospitality Trust Management (SGX: Q1P) derived close to 75% of its gross revenue from Australia in the third quarter of 2014. The attentive investor might want to look at the demand and supply picture for Australia’s hospitality market in this case.
3. Debt sensitivity
The volatile nature of the hospitality business may lead the Foolish investor to pay more attention to the debt profile of hospitality REITs. It is critical that hospitality REITs are able to fund its future growth and not run into financing issues during rough patches in the industry.
A quick comparison between CDL Hospitality Trusts and Ascott Residence Trust (SGX: A68U) can reveal important differences in the debt sensitivity between two trusts.
In this instance, the interest coverage ratio for Ascott Residence Trust is lower than CDL Hospitality Trusts, but the percentage of borrowings with fixed rates is much higher.
Source: REITs’ earnings presentation
We may want to focus on looking for the best combination of growth prospects, and debt profile.
The best REIT in Singapore may be judged by the earnings power of the properties that it owns, the trends which favor it, and the price that we pay for its units.
Of course, there can always be more factors to consider – like the ability of its management to fund future purchases or enhancements – and each REIT will offer its own version of pros and cons.
But either way, if we can find the best combination, then we may have found our next investment candidate.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.