CDL Hospitality Trusts - DBS Research 2018-07-30: Upward Trend Still Intact

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CDL HOSPITALITY TRUSTS SGX:J85

CDL Hospitality Trusts - Upward Trend Still Intact 

• CDL Hospitality Trusts (CDREIT)’s 2Q18 DPU of 2.14 Scts (+2.4% y-o-y) was below expectations.
• Singapore RevPAR was down 0.9% y-o-y in 2Q18 owing to softer corporate demand from two mid-week public holidays in May and the Trump-Kim summit.
• Limited new room supply over next three years gives us confidence that 2Q18 is a temporary dip and we are still on track for a multi-year upturn.

Attractive growth profile.

• We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised Target Price 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 3-5% p.a. This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 5% 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 a 100% payout ratio.

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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 CDL Hospitality Trusts (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, CDL Hospitality Trusts (CDREIT)’s gearing stabilised around the 33% level. With the debt headroom, the expected accretion to any debt-funded acquisition would act as the next boost to CDL Hospitality Trusts (CDREIT)’s share price. 

Valuation: 

• On the back of weaker-than-expected 2Q18 results, we lowered our DCF-based Target Price to S$1.95 from S$2.00.

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 - Softer-than-expected quarter

2Q18 DPU of 2.14 Scts (+2.9% y-o-y)

• CDL Hospitality Trusts (CDREIT)’s 2Q18 DPU came in at 2.14 Scts, up 2.9% y-o-y resulting in 1H18 DPU of 4.31 Scts (+5.1% y-o-y). This was below expectations given 1H18 DPU only represents 42% of our original FY18F DPU. The 2Q18 DPU was also boosted by c. S$1.1m worth of capital gains from the early divestments of Mercure and Ibis Brisbane. The amount of gains distributed was not disclosed.
• The underperformance was mainly due to a weaker- than-expected performance from the Singapore hotels. 2Q18 RevPAR was down 0.9% y-o-y to S$153, as occupancy dropped 2.7ppts to 83.5%, partially offset by a 2.3% y-o-y increase in ADR to S$184. This compares to a 5.9%, 1.5% and 7.2% y-o-y increase in overall Singapore RevPAR for the month of April, May and June respectively based on STB and STR Global data.
• CDREIT attributed the drop in its RevPAR to corporate demand being adversely impacted by two mid-week public holidays in May and the Trump-Kim summit in June as well as impact from hotels that opened in late 2017. We understand RevPAR in April was up, down in May and flattish in June.
• Owing to the softer RevPAR performance, 2Q18 revenue and NPI for the Singapore hotels fell 2.6% and 2.2% y-o-y respectively. Combined with the absence of income following the sale of Mercure and Ibis Brisbane in January, overall 2Q18 group revenue and NPI fell 0.3% and 3.7% y-o-y respectively.

Generally softer performance outside Singapore

• The softer 2Q18 results were also due to NPI for the New Zealand operations dropping 20% y-o-y. RevPAR fell 11.6% y-o-y due to a high-base effect as there were major sporting events in 2Q17 such as the World Master Games as well as the Irish Lions Rugby Tour.
• Meanwhile, the Maldives properties had a soft quarter (NPI down 55% y-o-y) as expected due to competitive environment as well as the closure and ongoing AEI works to convert Jumeirah Dhevanafushi into a Raffles branded property by year-end. On the positive note, we understand the Maldives government has announced plans to slow down the development of new resorts.
• On the positive side, income from the UK portfolio rose 12% y-o-y, as CDREIT benefitted from an additional 34 days of NPI contribution the Lowry Hotel which was acquired on 4 May 2017. Nevertheless, underlying UK RevPAR was weaker, down 1.1% y-o-y largely due to a decline in RevPAR at Hilton Cambridge City Centre which was affected by new room supply. However, we understand RevPAR for the Lowry Hotel was up y-o-y.
• Japan had a poor quarter with NPI down 8.1% y-o-y as new supply offset the continued growth in inbound tourists into Japan. RevPAR for CDREIT’s Tokyo properties reported a 2.2% y-o-y drop over the quarter.

Strong balance sheet maintained

• CDL Hospitality Trusts (CDREIT) remains in a strong financial position with gearing at 33.2%.
• Average costs of debt increased to 2.4% from 2.1%. This is largely expected as CDREIT refinanced the remaining bridge loan which was used to fund the acquisition of Pullman Hotel Munich.

Potential uplift in 2H18

• For the first 25 days of July, the market remained competitive with RevPAR for the Singapore hotels down 2.2% y-o-y. However, CDREIT guided that based on the strong bookings towards the end of the month, July is likely to be flat y-o-y.
• Beyond July, we understand bookings are on a stronger footing which points to a stronger 2H18.

Medium-term uplift from AEIs

• CDL Hospitality Trusts (CDREIT) is planning to undertake the renovation of the guest rooms in the Orchard wing at the Orchard Hotel between 4Q18 and 1Q19.
• In addition, CDREIT intends to conduct a phased room refurbishment exercise at Grand Copthorne Waterfront Hotel.
• In the medium term, it is also exploring opportunities to upgrade its other Singapore hotels such as M Hotel and Copthorne King’s Hotel.
• We believe while there may some short-term disruptions to CDREIT’s operations and earnings, these AEIs should better position CDREIT’s properties with a commensurate uplift in ADR over time.

Pricing in softer 2Q18 performance and potential impact from planned AEIs

• To better reflect the weaker-than-expected performance and potential impact from the planned AEI’s at Orchard Hotel and Grand Copthorne Waterfront Hotel, we lowered our RevPAR growth assumptions from 4-5% to 2-4% p.a. growth for the Singapore portfolio over FY18-20F. Consequently, we lowered our FY18-20F DPU by 4-5% and reduced our DCF-based Target Price to S$1.95 from S$2.00.

Maintain BUY, revised Target Price of S$1.95

• Despite weaker-than-expected 2Q18 results, we maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a Target Price of S$1.95. We continue to believe that CDREIT remains leveraged to the expected multi-year upturn and the dip in RevPAR in 2Q18 is a temporary pause as limited new supply over the next few years should result in an upward squeeze on room rates.
• In addition, CDREIT’s share price at current level remains undervalued with the implied value of its Singapore portfolio being 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.

Mervin SONG CFA DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-30

SGX Stock Analyst Report BUY Maintain BUY 1.95 Down 2.000