CDL Hospitality Trusts - Positioned for the impending recovery
- 1Q17 DPU of 2.42 Scts (+9% y-o-y) above expectations.
- Better-than-expected contribution from the New Zealand and Singapore hotels.
- Favourable risk-reward at current levels for a recovery in the Singapore hospitality market from 2018 onwards.
- We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised TP of S$1.70.
- Although we now expect the Singapore market to only recover in 2018, we believe the current low share price has largely priced in the current downturn and CDREIT offers compelling long-term value given its Singapore portfolio trades on a heavily discounted implied price per key.
- In addition, CDREIT offers patient investors an attractive 6.6% yield (based on 90% payout ratio) ahead of the eventual upturn.
Cheapest REIT to ride the eventual upturn.
- CDREIT’s implied price per key for its Singapore portfolio stands at less than c.S$500,000 which is below its replacement cost of c.S$700,000, recent market transactions of above S$650,000, and that of other listed Singapore hospitality REITs of between S$650,000 and S$1m.
- Given the quality of the portfolio and CREIT’s long-term track record, we believe this discount is unwarranted. Thus, CDREIT is the cheapest REIT providing exposure to the upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressures ease.
Several mitigating factors during downturn in the Singapore hospitality market.
- While CDREIT’s core Singapore market faces a downturn, we believe this will be tempered by higher earnings contribution from New Zealand, following the appointment of Millennium & Copthorne Hotels as the new operator of CDREIT’s Auckland property and the negotiation of a more favourable lease structure.
- In addition, we see upside to our DPU estimates should it decide to utilise its S$382m debt headroom for acquisitions.
- On the back of stronger-than-expected 1Q17 performance, we raised our DCF-based TP to S$1.70 from S$1.65 previously.
Key Risks to Our View
- Weaker-than-expected demand supply outlook in Singapore.
- The key risk to our view is a weaker-than-expected demand-supply outlook for the Singapore hospitality market.