UOB Kay Hian Research 2015-07-30: Sector Research - Singapore REITs - CDL Hospitality Trust

2Q15: CDL Hospitality (Below Expectations), Frasers Hospitality (Above Expectations) Starhill Global (In Line With Expectations). 

  • Maintain BUY on CDREIT with a reduced target price of S$1.90, factoring in the weaker-than-expected outlook for the hospitality segment. Management is eyeing possible foreign expansion in Japan as the domestic outlook remains bleak. 
  • Maintain BUY with an unchanged target price S$1.02 for FHT. Properties in Japan, Australia and the UK are expect1ed to continue their outperformance, while Singapore and Malaysia will see softer performance. 
  • Maintain BUY on SGREIT with an unchanged target price of S$0.96. 
  • Maintain MARKET WEIGHT on the sector. 


  • CDL Hospitality Trust (CDREIT), Frasers Hospitality Trust (FHT) and Starhill Global REIT (SGREIT) reported their quarterly results. 


CDL Hospitality Trust (CDREIT SP/BUY/ S$1.63/Target: S$1.90) 

• Results below expectations 

  • Results below expectations with 2Q15 DPU down 10.0%, below our and consensus expectations at 44.3% of 1H15 estimates on higher interest costs and weaker performance from Singapore. Interest costs ballooned by a surprising 49.5% in the quarter, due to the Japanese acquisitions which were wholly debt-funded as well as refinancing of short-term borrowings. 

• Operational highlights. 

  • Occupancy among CDREIT’s Singapore hotel portfolio saw a 1.2ppt decline to reach 86.5% in the latest quarter. 
  • Gearing on the other hand dipped 0.3ppt to hit 32.0% in 2Q15. 
  • Borrowing costs remained flat at 2.7% during the quarter. 
  • Japan Hotels saw RevPar leap 29.1% as visitor arrivals in Japan surged 46% yoy to reach 9.1m arrivals ytd June.
  • This was attributed to a weaker yen and tourism-friendly initiatives like visa exemptions. 
  • As of 31 December, 67 countries and regions have been exempted from visa requirements, according to the Japan’s Ministry of Foreign Affairs. 
  • Distributions from Japan will likely come in 4Q15, however, due to compliance with TMK rules. 

• Tourist arrivals in May brought some cheer, 

  • Tourist arrivals in May brought some cheer, with a 1.1% yoy increase in visitor arrivals marking the first positive growth in 16 months (since Feb 14). 
  • Chinese arrivals have gone from strength to strength since April this year, catapulting 47.1% yoy in May, showing increasing signs of stabilisation. 
  • Overall, Singapore’s tourism registered a 4.1% decline ytd May, attributable to the ongoing decline in Indonesian tourists as the rupiah declined approximately 6% in the same period. 
  • We expect to see a certain degree of stabilisation in RevPAR in 2H15 due to the positive spillover effects surrounding the SG50 celebration, coupled with the recent weakening of the SGD to IDR. 

• Further supply-side bruising for Singapore’s hospitality scene, though management remains unruffled. 

  • The hospitality sector is set to expand 7.7% in 2H15, adding some 4,405 rooms before the year is out. 
  • We are somewhat heartened to note that upscale/luxury rooms make up only 6.1% of incoming supply due to hit the market. 
  • The Singapore Tourism Board (STB) had earlier revised the visitor arrival growth forecast for 2015 to 0-3%. 

• Looking out for acquisitions in Japan. 

  • With debt headroom of S$322.3m assuming gearing limit of 40%, significant scope exists for overseas expansion. 
  • Management remains on the active lookout for acquisitions in its preferred target market Japan, being partial to assets on leases that provide greater profit sharing through variable rent. 
  • Acquisitions in Singapore, Maldives and Dubai have not been ruled out however. 

• Maintain BUY 

  • Maintain BUY with a reduced target price of S$1.90/share based on two-stage dividend discount model (required rate of return: 7.8% and terminal growth rate: 2%). 
  • We have reduced FY15, FY16, FY17 DPU estimates by 4.1%, 3.0% and 2.9% respectively, taking into account the confluence of a supply overhang and demand-side malaise plaguing the hospitality sector. 

(Vikrant Pandey; Derek Chang)

Source: http://research.uobkayhian.com/