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3 Hospitality REITs in Focus This Week

Earnings season is upon us. 

This week, no fewer than 13 real estate investment trusts (REITs) will be releasing their earnings update for the final quarter of 2018. Among them, are three hospitality REITs — Frasers Hospitality Trust (SGX: ACV), OUE Hospitality Trust (SGX: SK7) and CDL Hospitality Trusts (SGX: J85).

Despite the strength of the Singapore dollar, arrivals in Singapore increased by 7.5% in the first eight months of 2018. Higher arrivals from the United States (+13.6%), China (+9.4%) and India (+16.3%) were the biggest contributors to the larger visitor numbers.

With the bullish trends of the hospitality sector in Singapore, investors might have their eyes peeled on the three REITs when they release their results. Here’s what investors should be looking out for.

Frasers Hospitality Trust

Frasers Hospitality Trust owns properties in Singapore, Australia, the United Kingdom, Malaysia, Japan, and Germany. While the Singapore hospitality sector has thrived, other geographical markets have not fared so well.

Due to poor performance in its Australian portfolio, Frasers Hospitality Trust revenue and distribution per security declined 6.9% and 4.8% respectively in the last reporting quarter.

Source: Frasers Hospitality Trust FY17/18 Q4 Earnings Presentation

The challenges Down Under continue to be a major worry. In Melbourne, there is going to be a large influx of new supply of hotel rooms, with 11 development projects, representing 2,527 rooms or 11.9% of existing stock currently underway. Moreover, the Australian dollar has depreciated considerably against the Singapore dollar since 2008.

As Australia represents its largest market, the harsh operating environment in Australia will continue to pose a threat to Frasers Hospitality Trust in the next reporting quarter. All eyes should be on how the trust’s Australia portfolio performs this quarter and the impact on its distributions from foreign currency fluctuations.

OUE Hospitality Trust

OUE Hospitality Trust owns two hotels in Singapore — Mandarin Orchard Singapore and Crowne Plaza Changi Airport– and Mandarin Gallery, a shopping mall connected to Mandarin Orchard.

In the first nine months of 2018, despite a 0.2% improvement in gross revenue in its hospitality portfolio, total revenue still declined 0.6% due to a 2.8% decline in revenue earned from Mandarin Gallery.

With a negative rental reversion rate of 9.3% in the third quarter of 2018, it is likely that there the trust’s retail segment will continue to weigh down on its earnings in the reporting quarter.

CDL Hospitality Trust

Like the two trusts above, CDL Hospitality Trust had a difficult third quarter of 2018. Net property income from all of its geographical markets, except Japan, was lower compared to a year ago.

Source: CDL Hospitality Trust Earnings Presentation

Despite the above, there are some reasons to be optimistic about the future.

First, with Singapore contributing close to 60% of the trust’s net property income, CDL Hospitality Trust can ride on the coattails of the healthy Singapore hospitality market. 

In addition, the trust recently acquired a 95% stake in Hotel Cerretani Florence, MGallery by Sofitel. This is the trust’s maiden acquisition in Italy and based on proforma calculations, it is expected to be contribute to higher distribution per stapled security.

In the upcoming update, I will be keeping an eye out on the performance of the new acquisition and that of the Singapore portfolio. The trust’s Maldives resort has also been closed for six months and investors should have their eyes peeled on updates on the renovation progress at the resort.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia does not own shares in any company mentioned.