S-REIT guide for Hospitality REITs

Hospitality Trust includes Hotels, Hostels, Resorts, and Residential properties. These REITs are considered cyclical stocks. In this blog post, we will highlight some points for investors looking into Hospitality REITs.

#1 Stapled Trust Structure

It has become a common practice for Hospitality Trust listed on SGX to be paired with a Business Trust. Once paired, these two trusts cannot be traded separately and are labeled as “Stapled-securities”. The Stapled Trust Structure outlines the fiduciary responsibility and ownership of property portfolios of all involved parties. Currently, all 6 Hospitality Trust has a Stapled Trust structure in place.

Benefits of becoming a “Stapled-Securities”. 
  1. A Business Trust(BT) is here to secure a level of stable/reliable income for the REIT. This is achievable because BT is not bounded by the same regulatory requirements as REITs. BT allows for assets “trapped” in the organisational structure of REITs to be freed up and undertake opportunities it was otherwise prohibited from.
  2. BT also provides income from management services. 
  3. step in as a “master lessee of last resort” when there are no other suitable master lessees to be found 

#2 Corporates market and Leisure market

SGX hospitality REITs rely on two sources of revenue,

  1. Stable income stream
    Primarily generated from master lease agreements with corporate tenants. Rental income from prolonged accommodation needs like residential tenants or student hostels. A minimum income guarantee and an Inflation-adjusted Rent revision clause should also be included in long-term lease agreements.
  2. Growth income stream
    Driven by tourists, businessmen, and MICE events. Growth base income streams are highly unreliable, and yet they can be extremely profitable if there is a demand. To gauge growth income performance use “Revenue per available room(RevPAR)” and Average daily rate(ADR). 

#3 RevPAR & ADR 

RevPAR & ADR are only used to measure performance in properties with no lease agreements like Hotels/resort rooms in the trust portfolio.

ADR measures the pricing strength of the property and RevPAR shows the property’s ability to fill its available rooms at an average rate. There are 3 things we should note,

  1. RevPAR does not represent profitability. High RevPAR means high room occupancy or high ADR. It does not account for operating expenses that may have been incurred like abnormally high marketing expenses.
  2. Past ADR & RevPAR figures are required. The comparison is needed to spot any declining trends in property performance. Investors should take note of any seasonality characteristics while looking at these figures.
  3.  Use RevPAR index against our Trust RevPAR figures because:
    1. Gives an objective performance ranking of hotel sales & revenue management strategies relative to the CompSet.
    2. indicates details on the hotel’s competitiveness over time.

*A Competitive Set (or CompSet) is a group of properties that are comparable to the ones in the Trust portfolios .