CDL Hospitality Trusts - UOB Kay Hian 2019-07-18: Rejuvenated Portfolio Poised To Benefit From Supply-led Recovery

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - Rejuvenated Portfolio Poised To Benefit From Supply-led Recovery

CDL HOSPITALITY TRUSTS (SGX:J85) is the second-largest hospitality S-REIT with S$2.8b in AUM.
In the coming quarters, CDL Hospitality Trusts is poised to see enhanced contributions from the ramp-up of its rejuvenated portfolio (renovated Orchard Hotel and re-opened Raffles Maldives Meradhoo). We believe it is the preferred vehicle to ride the supply-led Singapore hotel recovery (Singapore accounted for 62.5% of portfolio valuation as of Dec 18).
Maintain BUY and target price of S$2.06.

In 1Q19, Orchard Hotel had 8.6% of its room inventory closed for renovations (Orchard Wing). Some 260 bedrooms will undergo phased refurbishment which is expected to have been completed in Jun 19, and another 65 Club Floor rooms will complete renovations in 3Q19. The significant modernisation of room products will help enhance guest experience, the hotel’s competitive edge, and pricing power (increase of S$10-15/room-night).
Since most corporate customers are locked in a typical 1-year request-for-proposal (next season of RFPs in Jul/Aug 19), the average daily rate (ADR) improvement may only flow through in the coming quarters.
In 1Q19, Orchard Hotel also completed a major facelift of all meeting facilities, as well as the Grand Ballroom (one of only four hotels in Singapore with a ballroom that can accommodate > 1,000 guests), strengthening its competitive edge in the MICE space.

Supply CAGR is expected to decelerate to 1.3% from end-18 to 2022 (2014-18: 4%). The tightened new supply is partly due to a lack of hotel sites under the Government Land Sale (GLS) programme since 2014. The subsequent re-introduction of hotel sites at Club Street (390 rooms) and Marina View (540 rooms) in 2H18 GLS also signals government consensus with our view that a supply shortage will be acute in the coming years.

Dhevanafushi Maldives Luxury Resort was closed from Jun 18 for major renovations and will be rebranded as Raffles Maldives Meradhoo (with elevated product offerings in the luxury segment). Refurbishment works are well advanced. Land villas will be soft-opened in 2Q19, while overwater villas will open later this year.

Raffles Maldives Meradhoo will be the first flagship Raffles Hotels & Resorts property in Maldives, which will benefit from the strong distribution network of AccorHotels (operating ~4,500 hotels in 100 countries). AccorHotel’s strength in European distribution would help the resort gain traction with European visitors with longer ALOS of 1-2 weeks (vs previous Chinese and Middle Eastern tourists with ALOS of a few days). When fully opened, the asset may need 1+ years before it can be fully ramped up to stable occupancy in excess of 70% and ADR of about US$1,200 (vs US$900+ under previous operator).

Other Singapore hotels are being evaluated for AEI opportunities, according to CDL Hospitality Trusts management. Most hotels will typically refurbish their rooms (change of carpets, furniture etc) every 8-10 years, and public areas (design of the lobby) every 15-20 years, based on industry channel checks.
The refurbishment projects are expected to give CDL Hospitality Trusts's portfolio a competitive advantage in the coming years, positioning them for recovery in the Singapore hotel sector. These AEIs also serve as a defence in terms of market positioning, against some of the newer hotels (Intercontinental Singapore Robertson Quay, Sofitel Singapore City Centre, Courtyard Marriot at Novena and Andaz Singapore).

Regulatory crackdown on Airbnb listings has curbed overall supply increases (despite growing limited-service hotel supply in Tokyo).
In 1Q19, tourist arrivals in Japan increased 5.7% yoy. Major sporting events, such as the Rugby World Cup 2019, Tokyo Olympics 2020 and Tokyo Paralympics Games 2020, and the development of integrated resorts are likely to spur future tourism demand.

With AUM of S$2.8b, CDL Hospitality Trusts is the second-largest hospitality S-REIT and the sixth-largest in Asia Pacific. CDL Hospitality Trusts derived 62.5% of its portfolio valuation from Singapore (S$1.7b, 2,718 keys) as at Dec 18. The majority of its Singapore hotel assets are in the upscale and mid-tier segments.

Our target price of S$2.06 is based on DDM (required rate of return: 6.75%, terminal growth: 2.0%).

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-18

SGX Stock Analyst Report BUY MAINTAIN BUY 2.060 SAME 2.060