CDL Hospitality Trusts - DBS Research 2018-11-01: Hotels Turning Around From 4Q18


CDL Hospitality Trusts - Hotels Turning Around From 4Q18

  • CDL Hospitality Trusts (CDREIT)'s 3Q18 DPU while weak is expected to be a bottom. 
  • Expected improvement in Singapore hotels’ RevPAR did not materialise, but rather fell 0.2% y-o-y. 
  • Singapore RevPAR for first 29 days of October up 7.2% gives rise to hope that we are still in the midst of a multi-year recovery.
  • Deploying proceeds from recent asset sale to drive a re-rating. 

Attractive value.

  • We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised Target Price of S$1.85.
  • While CDREIT has disappointed over the last 2 quarters, we believe the projected recovery in the overall Singapore hospitality market, with revenue per available room (RevPAR) growth of 3-5% p.a. over the next few years, should drive share price higher. This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 3% between 2017-2020.
  • Moreover, CDREIT’s yield is based on a 90% payout ratio versus its peers which typically have a 100% payout ratio.

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 - Transitionary quarter

3Q18 DPU down 5% y-o-y

  • CDREIT reported 3Q18 DPU of 2.18 Scts, which was down 4.8% y-o-y, with 9M18 DPU of 6.49 Scts (+1.6% y-o-y).
  • The results were below expectations as 9M18 DPU only represents c.66% and c.68% of our and consensus FY18F DPU estimates respectively.
  • While weakness was expected from some of CDREIT’s overseas operations, the projected uplift from the Singapore portfolio did not materialise, rather we saw a marginal dip in revenue per available room (RevPAR).
  • Consequently, in combination with the divestments of Mercure Brisbane and Ibis Brisbane, 3Q18 revenue and NPI fell 8.8% and 10.2% y-o-y respectively.
  • Partially tempering the impact of lower earnings, DPU was boosted by the distribution of S$1.8m, a large proportion representing proceeds from the disposal of CDREIT’s Brisbane properties.

Singapore portfolio underperformed but RevPAR for first 29 days of October up 7.2% y-o-y

  • 3Q18 RevPAR for CDREIT’s Singapore hotels fell 0.3% y-o-y to S$165, with occupancy hitting 90.8% from 88.7% in 3Q17, offset by a 2.6% y-o-y decline in average daily rate (ADR) to S$182.
  • Similar to 2Q18, it appears that CDREIT’s Singapore portfolio underperformed the overall Singapore market which based on STB statistics reported a 4% y-o-y increase for the first two months of the September quarter. However, the portfolio tracked the upper category which continues to struggle to achieve higher yields despite limited new supply this year and which recorded flat RevPAR performance for the first two months of the September quarter.
  • We understand the CDREIT’s RevPAR performance was also affected by renovation works at Orchard Hotel which involved the closure of the main lobby and certain public areas. Furthermore, while demand during weekdays have been relatively healthy, the ability to maximise yields on the weekends has been a challenge. Excluding Orchard Hotel, 3Q18 RevPAR would have increased by 1.3% y-o-y, which underperformed FEHT’s 3% y-o-y increase on a same asset basis.
  • CDREIT disclosed that for first 29 days of October, RevPAR was up 7.2% y-o-y which if sustained will help offset the softer than expected performance over the last two quarters. However, for November, we understand forward bookings have been impacted by the Deepavali holiday.

Improvement in Japan and Germany

  • The Japan hotels had a strong quarter with 3Q18 NPI jumping 8.4% y-o-y. The properties had struggled in the last few quarters due to increased supply and Airbnb. However, from June 2018, all Airbnb hosts are required to obtain a government permit to operate, and this has reduced the number of Airbnb listings, easing competition for hotels. Therefore, the Japan portfolio reported 5.9% y-o-y increase in RevPAR compared to the 8.9% and 2.2% y-o-y declines in 1Q18 and 2Q18 respectively.
  • On the back of strong events calendar, Pullman Munich had a robust quarter with RevPAR increasing 3.9% y-o-y translating to NPI from Germany jumping 16.8% y-o-y.

Normalisation of earnings in NZ, impact from closure of property in Maldives and softer UK performance

  • Dragging the 3Q18 results, was the normalisation of hotel performance in Auckland following strong growth over the last 2-3 years. 3Q18 RevPAR fell 6% y-o-y from the absence of the British and Irish Lions Rugby Tour series which took place last year. 3Q18 results from New Zealand was also impacted by a weaker NZD, with NPI falling to 10.8% y-o-y to S$3.9m
  • The Maldives operations reported a small loss of S$112,000, owing to the closure of Jumeriah Dhevanafushi which is undergoing renovations and is set to be reopened as a Raffles resort at end 4Q18. However, 3Q18 RevPAR for Angsana Velavaru which is still operational jumped 6.5% y-o-y despite increased competition from newly opened resorts.
  • During the quarter, NPI for the UK portfolio fell 6.6% y-o-y. This largely driven by RevPAR falling 1.2% which in turn was caused by declines in The Lowry due to lower number of events in Manchester and renovations partially offset by the improvement at Hilton Cambridge City Centre.
  • Australian earnings were down largely due to disposal of Mercure Brisbane and Ibis Brisbane and depreciation of AUD. NPI fell 34.5% y-o-y to S$2.4m.

Modest gearing with stable borrowing costs

  • Due to FX movements, gearing inched up to 33.8% from 33.2% at end June 2018 with net asset value per unit falling to S$1.49 from S$1.52 previously.
  • However, borrowing costs was stable at 2.4% largely due to 65.6% of debt on fixed rates.

Several AEI works planned

  • CDREIT has several refurbishments planned. This includes renovations works on the lobby and upgrade of food and beverage outlets at Orchard Hotel which are scheduled to completed by end-2018. In addition, around 260 rooms at the Orchard wing of Orchard Hotel (total 656 rooms for the hotel) will be renovated progressively from mid-November to 2Q19.
  • Upgrading works for new Raffles resort in the Maldives is on target to be completed by the end of the year while the refurbishment of 28 land villas are currently planned at Angsana Velavaru.
  • For the Lowry Hotel in Manchester, CDREIT announced intentions to upgrade the public areas and other facilities.
  • While these AEI plans are expected enhance the competitive position of CDREIT’s properties when completed, there may be some drag on earnings in the near term.

Incorporating softer than expected performance

  • Due to the weaker than expected 3Q18 performance, we reduced our FY18-20F DPU by 5% p.a. 
  • For CDREIT’s Singapore portfolio, we have assumed flat RevPAR growth in FY18F versus 2% previously given the inability to raise yields. However, for FY19- 20F we maintained our 3-4% RevPAR growth projection due to limited new supply in 2019, which is predominantly from Sentosa which should not impact CDREIT’s properties.
  • In addition, we have also reduced profitability assumption of the Maldives’ operations due to larger than expected losses year-to-date.
  • On the back of the lower earnings assumptions, we also reduced our DCF-based Target Price of S$1.85.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | 2018-11-01

SGX Stock Analyst Report BUY MAINTAIN BUY 1.85 DOWN 1.950