CDL Hospitality Trusts - DBS Research 2017-12-15: The Ace In Your Portfolio

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CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - The Ace In Your Portfolio

• CDL Hospitality Trusts (CDREIT)'s 3Q17 DPU of 2.29 Scts (-4% y-o-y) impacted by negative carry from recent rights issue.
• Contribution from Singapore hotels was flat y-o-y despite RevPAR falling 1.2% as CDREIT benefited from increased F&B revenues.
• Announced AEIs in Singapore and Maldives to enhance CDREIT’s competitive position.

Attractive growth profile. 

• We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised TP of S$1.95. 
• With supply expected to ease over the next three years, we project a recovery in the Singapore hospitality market with revenue per available room (RevPAR) potentially growing by 3% p.a. or higher. This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 7% between 2017 and 2019, based on CDREIT’s 90% payout ratio which compares favourably against flattish or modest 1-2% growth for many other REITs.

Where we differ – Should trade at a higher premium to book.

• Consensus has a HOLD recommendation with a target price at CDREIT’s current share price which implies CDREIT’s Singapore portfolio is valued at c.S$600,000 per key, below market transactions of at least S$650,000, and other listed Singapore hospitality REITs that are valued between S$700,000 and S$1m.
• With a potential upturn in the Singapore market over the next three years, this is too conservative, in our view. Thus, we believe given the quality of its properties, CDREIT will re-rate closer to our TP which implies price per key of S$850,000 for its Singapore portfolio.

Acquisition the ace in the pack. 

• Post the recent rights issue and announced acquisitions, CDREIT’s gearing is expected to stabilise around the 33-34% level. 
• With the additional debt headroom, the expected accretion to any debt-funded acquisition would act as the next boost to CDREIT’s share price.

Valuation

• On the back of increased confidence in the holding value of CDREIT’s Singapore portfolio, we have raised our DCF-based TP to S$1.95 from S$1.75 as we lowered our beta assumptions.

Key Risks to Our View

• Weaker-than-expected demand supply outlook in Singapore.
• The key risk to our view is a weaker-than-expected demandsupply outlook for the Singapore hospitality market.

WHAT’S NEW - Down but not out 

3Q17 DPU down as expected due to the impact of the recent rights issue 

• CDL Hospitality Trusts (CDREIT)'s 3Q17 DPU was down 4% y-o-y to 2.29 Scts and represented c.25% of FY17F DPU. The fall in DPU was largely expected, given the impact from the recent rights issue.
• Nevertheless, underlying 3Q17 NPI was strong, up 15.9% largely due to the increased contribution from the New Zealand acquisition of The Lowry Hotel and Pullman Hotel Munich as well as relatively stable performance from Singapore.

Singapore RevPAR down but NPI contribution flat 

• 3Q17 NPI from the Singapore hotels was relatively flat, up 0.2 y-o-y. This was despite RevPAR falling 1.4% yo-y to S$1.66 as the pricing competition remains on the back of an increase in supply. 
• Over the quarter, CDREIT focused on maximising its ADR, which rose 0.8% y-o-y to S$187 at the expense of occupancy, which fell 2 points to 88.7%. In addition, CDREIT benefited from an improvement in F&B earnings, given a flattish NPI profile.
• Going into 4Q17, CDREIT guided it has had a soft start with RevPAR for the first 25 days of October 2017 down 1.1% y-o-y. Nevertheless, should the modest decline in RevPAR continue into 4Q17, there is potential upside to our numbers for the Singapore operations as 9M17 RevPAR is only down 1.2% versus our projections for a 3-4% fall for the whole of FY17.

Continued strong performance from New Zealand as well as boost from the UK and Australia 

• The New Zealand portfolio maintained its strong performance with 3Q17 jumping 56.1% y-o-y, on the back of 32% y-o-y increase in RevPAR (in NZD terms), appreciation of the NZD versus SGD, and impact of a new lease structure signed last year. The buoyant New Zealand market has benefited from strong visitor arrivals (9M17 visitor arrivals rose 7.4% y-o-y to 2.6m visitors) and constrained supply. 
• Meanwhile, NPI from the UK jumped 42.7% y-o-y mainly attributed to the acquisition of The Lowry Hotel. Excluding this acquisition, we understand NPI in SGD for the Hilton Cambridge City Centre was weaker due to the depreciation of the GBP. Nevertheless, RevPAR for Hilton Cambridge City Centre was stable yo-y partially due to recent terror attacks and temporary closure of Manchester Arena until mid-September 2017.
• Contribution from Australia was also stronger over the quarter mainly due to a stronger AUD. NPI rose 4.3% y-o-y. Underlying performance in AUD was subdued with CDREIT receiving a fixed rental with minimal variable income owing to the increase in new hotel supply in Brisbane and Perth. 

Japan and Maldives remain soft 

• As expected, the Maldives resorts remain weak due to pricing pressure as Chinese arrivals, a key source market, continue to be soft amid an increase in new supply. RevPAR was down 24.6% y-o-y, resulting in NPI dropping 17.7% y-o-y.
• Likewise, CDREIT’s Japanese properties faced increased competition from new hotel supply, with 3Q17 RevPAR registering a 2.5% y-o-y decline and NPI falling 14.9% y-o-y. However, CDREIT guided that the downward pressure on RevPAR may moderate going forward.

Fall in gearing 

• Post the rights issue, gearing fell to 33.3% from 38.7% at end 2Q17. 
• The weighted average cost of debt also declined to 1.8% from 2.3% as CDREIT took on a EUR-denominated bridge facility to fund its German acquisition. CDREIT’s borrowing costs is expected to increase back above the 2% level once it refinances its bridge facility.
• Likewise, the proportion of fixed-rate debt fell to 38.2% from 61% in the prior quarter due to the impact of the bridge facility. Similar to the borrowings costs, the percentage of fixed-rate debt should rebound to the 60-70% level once CDREIT secures a longer-term debt facility.
• NAV per unit dipped to S$1.47 from S$1.55 at end-December 2016 as a consequence of FX movements and additional units on issue following the recent rights issue.

Planned AEI’s to maintain CDREIT’s competitive position 

• CDL Hospitality Trusts (CDREIT) announced plans to refurbish the Orchard wing of its Orchard Hotel property. Commencing in late December, around 260 rooms will be refurbished over a 3.5-month period.
• Likewise, CDREIT also plans to enhance the positioning of its Maldives properties ahead of heightened competition. The Dhevanafushi property will undergo enhancement in 2018 ahead of its rebranding into a Raffles Hotels and Resorts property. In addition, 28 land villas at Angsana Velavaru will be renovated during the low season in 2018.
• The estimated cost of these renovations has yet to be disclosed.

Target Price raised to S$1.95 

• The recent sale of New Cape Inn, a 76-room economy hotel in Tiong Bahru, on a 2% gross yield and price per key of around S$881k indicates to us that hotel assets in Singapore remain a highly desirable asset class. In addition, other hotels potentially up for sale have asking prices between S$900k to S$1.7m per key. 
• Given CDREIT’s Singapore hotels are in good locations and are well-managed, we are confident that CDREIT’s Singapore portfolio has significant holding value. To reflect this, we have raised our DCF-based TP to S$1.95 from S$1.75 after reducing our beta assumptions from 1.0x to 0.9x. Our TP implies price per key of around S$850k for CDREIT’s Singapore hotels.
• Our TP also implies a forward yield of 5.1%. While we anticipate some pushback from investors to this “low” yield, we believe this forward yield is artificially depressed, given CDREIT has a 90% payout ratio compared to other hospitality REITs which pay out 100% of their operating cashflows. On a 100% payout ratio, CDREIT’s forward yield based on TP of S$1.95 is still an attractive 5.7%. 
• Furthermore, we believe CDREIT can sustain a lower yield, given its strong 7% 2-year DPU CAGR and the fact that the hospitality sector is posed for a multi-year recovery.
• In addition, in the previous upcycle in 2010-2012, CDREIT traded up to 1.5x P/Bk with our TP conservatively implying only P/Bk of 1.3x.

Maintain BUY 

• With a projected 12-month total return of around 24%, we maintain our BUY call.
• We continue to recommend investors position themselves in CDREIT ahead of a potential recovery in the Singapore hospitality market next year as supply pressures in Singapore ease.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-12-15

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.95 Up 1.750