CDL Hospitality Trusts - DBS Research 2018-04-30: Be Part Of The Winner Circle

CDL Hospitality Trusts - DBS Vickers 2018-04-30: Be Part Of The Winner Circle CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Be Part Of The Winner Circle

  • CDL Hospitality Trusts'1Q18 DPU of 2.17 Scts (+7% y-o-y) in line with our expectations. 
  • Results boosted by acquisitions made in UK and Germany in 2017 and 1% y-o-y increase in Singapore portfolio RevPAR, the first increase in 10 quarters. 
  • Signs of sustained turnaround of Singapore portfolio with RevPAR for first 26 days of April up 4% y-o-y. 

Attractive growth profile.

  • We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a 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$1.76. This implies CDREIT’s Singapore portfolio is valued at c. S$700,000 per key, at the bottom end of the range of other listed Singapore hospitality REITs that are valued between S$700,000 and S$1m per key, and below asking prices for hotels in Singapore of in excess of 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, given the quality of its properties, CDREIT should re-rate closer to our Target Price which implies price per key of closer to c.S$850,000. 

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


  • We maintain our DCF-based Target Price of S$2.00. With expected 12 month total return of over 15%, we reiterate our BUY call. 

Key Risks to Our View: 

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

WHAT’S NEW - Signs of sustained turnaround

1Q18 DPU boosted by acquisitions

  • CDREIT’s 1Q18 DPU rose 7.4% y-o-y to 2.17 Scts. This represented c.21% of FY18F DPU which is the typical seasonal contribution for 1Q over the last few years and in line with our expectations.
  • The jump in DPU is largely attributed to the acquisition of the Lowry Hotel in UK and Pullman Munich last year. This also led to 1Q18 revenue and NPI increasing by 11.6% and 5.4% y-o-y respectively.
  • 1Q18 DPU was also aided by S$675,000 worth of capital distribution to offset the loss of income from the sale of Mercure Brisbane and Ibis Brisbane in January 2018.

First y-o-y increase in Singapore portfolio RevPAR in 10 quarters

  • The strong 1Q18 DPU was also underpinned by an improvement in the Singapore hotel portfolio (c.54% of 1Q18 NPI). 1Q18 NPI increased by 3.2% on the back of an increase in food and beverage contribution but more importantly better hotel revenue per available room (RevPAR) performance.
  • 1Q18 RevPAR increased by 0.8% y-o-y, the first y-o-y increase in over 10 quarters. The average daily room rate (ADR) increased 1.7% y-o-y to S$161, to offset the 0.8ppts drop in occupancy to 87.5%.
  • The higher ADR was boosted by the biennial Singapore Airshow which took place in February 2018 as well as some pricing discipline from the new hotels which opened in late 2017.

Generally lower contribution from CDREIT’s overseas operations

  • Despite RevPAR increasing 4.3% y-o-y on the back of healthy tourist arrivals into New Zealand (c.14% of 1Q18 NPI), NPI for CDREIT’s Auckland property fell 1.1% y-o-y due the depreciation of the NZD versus SGD.
  • CDREIT’s Maldives operations (c.6% of 1Q18 NPI) continued to be impacted by increased hotel supply as well as the recent travel advisory by various governments to avoid the country due to the state of emergency declared in February 2018. This resulted in RevPAR for the Maldives resorts to fall 18.8% y-o-y and 1Q18 NPI contribution to fall 29.2% y-o-y. Going forward, we expect earnings from the Maldives resorts to be weak compounded by the closure of the Jumeirah Dhevanafushi property from May until the reopening in 4Q18 as it undergoes renovations to convert it into a Raffles branded resort.
  • Contribution from Australia (c.7% of 1Q18 NPI) fell 28.1% y-o-y owing largely to the disposal of Mercure Brisbane and Ibis Brisbane.
  • Earnings from Germany (c.5% of 1Q18 NPI) fell 17% q- o-q due to seasonality but also 7.6% y-o-y drop in RevPAR as the property was impacted by the extreme temperatures in Europe but also the absence of a major biennial trade fair. However, we understand for the balance of the year, there is a stronger event calendar compared to 2017, which bodes well for the performance of the Pullman Munich going forward.
  • Similar to Germany, CDREIT’s UK properties (c.6% of 1Q18 NPI) were impacted by the cold snap. The travel disruptions and new supply resulted in RevPAR for Cambridge City Centre, falling 6.5% y-o-y. However, the Lowry Hotel in Manchester did well, registering a 6.8% y-o-y increase in RevPAR largely due to an uplift from the entertainment sector. On the back of purchase of the Lowry in 2Q17, NPI for the UK operations jumped 86.5% y-o-y.
  • While tourist arrivals into Japan rose 15.7% y-o-y for the first 2 months of 2018, CDREIT’s Japanese properties (c.3% of 1Q18 NPI) faced pressure on room rates due to rising hotel supply and competition from alternative accommodation options such as Airbnb as well as greater amount of budget conscious East Asian visitors. As a consequence, RevPAR for the Japan hotels fell 8.9% y-o-y with 1Q18 NPI dropping 10.8% y-o-y.

Temporary increase in gearing

  • Gearing increased to 33.2% from 32.6% as at end December 2017, owing to FX movements. However, we believe this is temporary as CDREIT has not pared down its debt following the receipt of proceeds from the sale of Mercure Brisbane and Ibis Brisbane. CDREIT’s earliest borrowings that are due only occurs in May 2018.
  • Average cost of debt remains stable with the proportion of fixed rate debt steady at c.59%.
  • Owing to increased units on issue, NAV per unit fell to S$1.50 from S$1.53 at end 4Q17.

Strong RevPAR performance at the start of April

  • CDREIT reported that for the first 26 days of April 2018, RevPAR for the Singapore hotels, jumped 4.1% y-o-y. This gives us confidence that our expectation for a recovery in the Singapore hospitality market will come to fruition as supply pressures ease and CDREIT’s DPU is on recovery path.
  • Beyond the boost from a recovering Singapore market, we also expect CDREIT’s DPU to continue to show strong y-o-y growth as it benefits from the full year contribution from acquisitions made in 2017 and further acquisitions by deploying its strong balance sheet.
  • Furthermore, CDREIT’s earnings should be enhanced near term by the completion of renovations at its Japanese properties. In the medium term, the refurbishment of hotel rooms at Orchard Hotel and Grand Copthorne in Singapore and villas at Angsana Velavaru, Maldives as well as the rebranding of Dhevanafushi Maldives Resort into a Raffles branded property should enhance the competition position of these properties and CDREIT’s earnings.
  • All in we project, CDREIT to deliver a healthy, 6% DPU CAGR over the next 3 years.

Maintain BUY, Target Price of S$2.00

  • We reiterate our BUY call on CDREIT with a Target Price of S$2.00 as we believe CDREIT offers one of the best leverage to the multi-year recovery in the Singapore hospitality market supplemented by acquisitions made over the past year.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2018-04-30
SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000