CDL Hospitality Trusts - DBS Research 2018-01-29: Here Is Where Growth Resides

CDL Hospitality Trusts - DBS Vickers 2018-01-29: Here Is Where Growth Resides CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Here Is Where Growth Resides

  • CDL Hospitality Trusts' 4Q17 DPU of 2.83 Scts (-5.7% y-o-y) above expectations.
  • Pricing discipline among hoteliers in Singapore, with RevPAR for CDREIT’s hotels only down 0.6% y-o-y despite opening of 7 hotels during the quarter.
  • Positive signs of turnaround in sight with RevPAR for Jan’18 flat to slightly higher; Target Price raised to S$2.00.

Attractive growth profile. 

  • We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised Target Price of S$2.00. 
  • 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 3-5% p.a. This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 6% between 2017-2020 which compares favourably against the modest 1-3% growth for many other REITs. 
  • Moreover, CDREIT’s yield is based on a 90% payout ratio versus its peers which typically have 100% payout ratio.

Where we differ –

Should trade at a higher premium to book.

  • Consensus has a HOLD recommendation with a target price at c.S$1.68. This 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 per key. 
  • 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 Target Price which implies price per key of S$850,000 for its Singapore portfolio.

Acquisitions the ace in the pack. 

  • Post the recent sale of Mercure Brisbane and Ibis Brisbane, we expect CDREIT’s gearing to stabilise around the 30-31% level. With the debt headroom, the expected accretion to any debt-funded acquisition would act as the next boost to CDREIT’s share price.


  • On the back of better than expected 4Q17 results, we raised our DCF-based Target Price to S$2.00 from S$1.95.

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.

WHAT’S NEW - Turnaround in sight

4Q17 DPU down but above expectations

  • CDREIT’s 4Q17 DPU fell 5.7% y-o-y to 2.83 Scts taking FY17 DPU to 9.22 Scts (-4.3% y-o-y) which was above our estimate of 9.07 Scts and consensus estimate of 9.1 Scts. 
  • While DPU was down as expected due to the impact of the rights issue earlier this year, and weakness from the Maldives and Japan, CDREIT outperformed largely due to a better than expected 4Q17 RevPAR in Singapore.

Improvement in Singapore RevPAR

  • Despite the Singapore hospitality market being hit by the opening 7 new hotels in 4Q17, CDREIT was able to achieve a 1.1% y-o-y increase in revenue per available room (RevPAR). This was largely driven by a 1.2% y-o-y rise in average daily room rate (ADR) to S$186, offsetting a 0.1 ppt decline in occupancy (83.5% versus 83.6% in 4Q16). 
  • On a full year basis, FY17 RevPAR for the Singapore hotels was S$159 (- 0.6% y-o-y), higher than our S$155 estimate. Despite the higher RevPAR, net property income (NPI) for the Singapore hotels fell 1.1% y-o-y, which we suspect may be driven by declines in F&B revenue.
  • Near term, there remains some pressure on RevPAR as the newly opened hotels ramp up their occupancy. On that front, CDREIT reported that for the first 24 days of January 2018, RevPAR for its Singapore hotels fell 5.5% y-o-y. However, we understand based on forward bookings, RevPAR for the whole of January 2018 should be flat or up. This indicates to us there is significant pricing discipline by the Singapore hotels, which bodes well for a recovery in RevPAR once the new hotels opened in 2017 stabilise. 
  • Management guided there is potential for RevPAR to grow by 2-5% in 2018, the most bullish commentary in many years.

Mixed performance in other markets

  • As expected, the Maldives operations continue to be hampered by increased supply with 4Q17 RevPAR dropping 13.2% y-o-y, resulting in 4Q17 NPI falling 25.5%.
  • Likewise, CDREIT’s Japanese properties are faced with increased competition from rising supply, which translated to a 4.5% fall in 4Q17 RevPAR and 16.4% y-o-y fall in 4Q17 NPI.
  • The UK operations had a strong quarter with 4Q17 NPI doubling from the prior year, largely due to the acquisition of Lowry Hotel. While Lowry Hotel recorded a 2.7% y-o-y increase in RevPAR, RevPAR for Hilton Cambridge City Centre reported an 8.5% y-o-y fall in RevPAR due to greater competition from new hotels.
  • New Zealand portfolio continued its strong operational performance with 4Q17 RevPAR increasing by 5.5% y- o-y. Nevertheless, 4Q17 NPI fell 4.9% y-o-y due to a weaker NZD and higher local property taxes.
  • The Australian operations were also affected by a weaker AUD, causing 4Q17 NPI to drop by 1.7% y-o- y.
  • RevPAR for the recently acquired Pullman Munich was up 3.5% y-o-y due to higher business from the corporate segment and higher occupancy from a new airline crew contract.

Fall in gearing

  • On the back of revaluation gains, gearing fell to 32.6% from 33.3% from end 3Q17. We saw improvements in property values in Singapore (+1%), Australia (+7% in AUD terms), New Zealand (+30% in NZD terms), offset by declines in Maldives (-13% y-o- y). Valuation for the UK and Japanese hotels were stable. NAV per unit also rose to S$1.53 versus S$1.47 at end September 2017
  • As expected, average cost of debt rose to 2.1% from 1.8% in 3Q17 as CDREIT refinanced its bridge loan for the Lowry Hotel and Pullman Hotel Munich acquisitions. Consequently, the proportion of fixed rate debt rose to 59% from 38.2% in the 3Q17.

Use of proceeds from disposal of Brisbane hotels

  • Post the disposal the Mercure Brisbane and Ibis Brisbane hotels for A$77m (5.3% exit yield) which was above the latest valuation of S$70m and initial purchase price of S$70m, CDREIT guided that the proceeds will either be used to fund future acquisitions and some of the gains paid to unitholders.

Raising our DPU estimates and TP to S$2.00

  • On the back of stronger than expected 4Q17 results, we raised our FY18-19F DPU by 1-2%. This was largely driven by higher RevPAR assumption for CDREIT’s Singapore portfolio but offset by the impact of higher taxes in Singapore and weaker USD/SGD and NZD/USD assumptions.
  • On the back of higher earnings estimates, we also raised our DCF-based TP to S$2.00.

Multi-year recovery in Singapore market to drive strong DPU growth profile

  • Over the next 3 years, we expect CDREIT to deliver DPU CAGR of c.6%. This strong DPU growth profile is mainly attributed to a recovery in the Singapore hospitality market, which should benefit from easing of new hotel supply (1-2% growth versus 4-7% over the last few years). This is also supplemented with the recent acquisitions of The Lowry Hotel and Pullman Hotel Munich.
  • Beyond this, we also see additional upside to our DPU forecasts if CDREIT redeploys the proceeds from the disposal of Mercure Brisbane and Ibis Brisbane.

Maintain BUY

  • With 4Q17 results ahead of expectations and CDREIT leveraged to the multi-year recovery in the Singapore hospitality market, we reiterate our BUY call with a revised Target Price of S$2.00.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-01-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.00 Up 1.950