In what is a rather muted economic performance for Singapore in 2023 thus far, one sector that is shining brightly is tourism. Not only have tourist arrivals recovered to two-thirds of pre-Covid-19 numbers in the first quarter of 2023, tourists also spent more per trip in what was a case of revenge spending. This got me interested to analyze how tourist dollars will trickle down to benefit tourism-related stocks listed on the SGX. Immediately, the likes of SIA and Genting came to the fore with their strong branding. In the end, I decided to revert to my comfort zone, REITs.
Both CDL Hospitality Trust (‘CDLHT’) and Far East Hospitality Trust (‘FEHT’) are amongst the top 5 movers under the REITs category in 2022 as shown in Diagram 1. Let’s find out if hospitality Trusts have more legs to run. This blog post compares CDL Hospitality Trust and Far East Hospitality Trust across various key metrices.
1) Dividend Yield
Since I am reviewing REITs, the first metric for comparison would be its dividend yield since investors typically buy REITs for long-term dividends. With reference to Diagram 2, Far East Hospitality Trust offers a 12-month trailing dividend yield of 5.21% while CDL Hospitality Trust comes in at 4.29%.
At first glance, it appears that FEHT is superior than CDLHT in terms of dividend yield. However, this does not tell the whole picture as trailing twelve months reflects the Distribution Per Stapled Security (‘DPS’) that was declared in 2022. If 2H2022’s DPS was annualized instead, the respective dividend yield for FEHT and CDLHT would be similar at 6.0%. For FEHT, 2022 DPS included partial divestment gains resulting from the sale of Central Square. On the other hand, I note that a larger share of CDLHT’s portfolio are under management contracts compared to FEHT as shown in Diagram 3 and 4.
Diagram 4 shows the earnings report of CDLHT from moomoo app. When read in conjunction with Diagram 3, it is evident that 56% of CDLHT’s revenue come from management contracts. This suggests that as tourism tailwinds continue to blow, there may be more upside for CDLHT since a larger proportion of its revenue is variable.
Do you know that when you earn dividends from your investment, that dividend will be deposited into your Moomoo SG universal account? The ex-dividend date and dividend payout date can also be found in Detailed Quotes > Summary tab in the Moomoo app.
2) Price-to-Book Ratio
A lower Price to Book (‘P/B’) ratio suggests that the REIT is trading at a bigger discount to its true value. As shown in Diagram 5, the P/B ratio of CDLHT and FEHT are 0.82 and 0.66 respectively.
However, such a comparison is too simplistic. Rather, I prefer to analyse the REIT’s current PB ratio relative to its historical average which is denoted by the grey line in Diagram 5. It is evident that both trusts are almost trading at their historical valuation although FEHT is probably just slightly under. Therefore, there is potential capital upside for FEHT if it manages to revert to its historical P/B valuation.
3) Ownership by Sponsor and Manager
I am curious to know why there is such a disparity in P/B valuation of these 2 hospitality trusts. There could be a couple of reasons – both tangible and intangible. As shown in Diagram 6, CDLHT has a larger float which leads to higher daily trading volume. In addition, its market capitalisation is also larger than FEHT.
This is confirmed by Diagram 7 which reveals the top shareholders of each trust.
CLDHT is 31% owned by Sponsor and Manager while FEHT is 52% owned by Sponsor and Manager. At more than 30%, I feel that there is strong alignment of interests and both Sponsors would want to ensure that their respective trusts perform well for security holders.
4) Debt to Asset Ratio
Given the high interest rate environment, extra attention must be paid to how the Managers navigate the capital markets. We have seen how financing costs have significantly reduced the distributable income of some REITs which were caught off-guard by the rapid increase in interest rates by Fed.
As shown in Diagram 8, CDLHT and FEHT’s gearing ratio are 37.5% and 32% respectively. I consider this as very healthy as there is significant buffer from the 50% gearing limit set by MAS.
5) Interest Coverage Ratio
Both Trusts report interest coverage ratio of around 3.5X. I find this to be rather low as I think a higher margin of safety should be 5X. This should gradually increase in the near term as tourism receipts grow.
6) Fixed Debt
CDLHT has 55% of its debt on fixed interest rate while FEHT has 47% of its debt fixed. Since I hold the view that interest rates may decrease in the near to mid term, I would prefer a REIT which has a smaller proportion of its debt on fixed interest rates at the current investment climate.
I have summarised my verdict of this comparison between CDLHT and FEHT over the 6 financial metrics in Diagram 9.
Under the current macro-economic environment, I would priortize safety and conservatism and that is why FEHT would be my preferred choice. However, investors with higher risk appetite may prefer CDLHT since there is a possibility of a growing DPS since a larger proportion of its hotels under management contracts.
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Disclaimer: All views expressed in the article are the independent opinion of Heartland Boy. Neither Moomoo Singapore or its affiliates shall be liable for the content of the information provided. It does not constitute and investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.
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