CDL Hospitality Trusts - UOB Kay Hian 2020-04-27: Weathering The COVID-19 Storm

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - Weathering The COVID-19 Storm

The onset of COVID-19 has resulted in CDL Hospitality Trusts’s overseas hotels temporarily closing (some remain open but with minimal occupancies), while most of its Singapore properties are block-booked for SHN purposes.
Some payroll reprieve (60-80% subsidy) is on the way in Apr 20, benefitting HMA hotels the most.

Distribution policy is under review pending more visibility from 1H20 results, although its liquidity position (S$104m cash reserves/37.4% net gearing) remains healthy.
Maintain BUY with a lower target price of S$1.32.

At a teleconference call on 24 Apr 20, CDL Hospitality Trusts (SGX:J85)'s management provided operational updates on Singapore/overseas properties, as well as payroll subsidies (60-80% up to a certain cap) from the various governments.

Singapore portfolio RevPAR declined 39.8% y-o-y, largely due to lower occupancy of 53.9% (-33.4ppt y-o-y, -33.3ppt q-o-q) and marginal decline in ADR.
Occupancy decline was mitigated by accommodation demand from foreign workers affected by border closures (eg Malaysia’s border closure from 18 March-12 May) and demand for returnees from overseas serving out their Stay-Home-Notice (SHN) in hotels.

As a pre-cursor, for the first 22 days of Apr 20, Singapore RevPAR declined by 62.4% from the same period last year (attributed more to lower ADRs). RevPAR calculations take into account SHN hotels on a full-allocation basis (regardless of underlying occupancy), and excludes out-of-order rooms undergoing renovations.
Despite the lower ADRs from the SHN business, our channel checks suggest they also incur lower cost of operations by cutting out online travel agents (eg Booking.com), reduced house-keeping (due to social distancing) and less food wastage (from pre-selection of food menu).
Novotel SG Clark Quay has also extended operations for an additional three months, as one of the SHN hotels. About 75% of missed events have also been postponed (and not cancelled), which hints at backlog of corporate bookings when the COVID-19 pandemic subsides. Management is also beginning to see the return of Chinese-booking interest for Aug 20, and several events slated for August and onwards (eg Formula 1 in Sep, Asia TV Forum in Dec 20) have not been cancelled.

Maldives properties affected by blanket suspension of on-arrival visas, resulting in several resort closures till mid-20. Raffles Maldives Meradhoo also temporarily closed since 1 Apr 20, while Angsana Velavaru will operate at reduced staffing. A new presidential villa at Raffles Meradhoo and refurbishment of remaining land villas at Angsana Velavaru are targeted for completion in mid-20. Angsana Velavaru saw a 31.2% y-o-y decline in 1Q20 RevPAR.

Australia NPI contributions were affected by a weaker AUD, although its lease structure continues to provide fixed rent in local currency.
New Zealand RevPAR declined 15% y-o-y, due to deterioration of trading environment from the border closure on 19 March and commencement of the country-wide lockdown. Management expects Grand Millennium Auckland to see a sharp downturn in the near term (ie which remains operational), although the lockdown measures will start easing from 27 Apr 20.
Japan RevPAR declined 33.6% y-o-y in 1Q20, due to flexible pricing amid reduced international demand. The postponement of the Tokyo 2020 Olympics and entry ban on foreign travelers of most countries will be a dampener this year.

UK RevPAR declined 27% y-o-y in 1Q20, from diluted corporate demand leading up to the mandated closure of UK hotels on 21 Mar 20 under the country’s lockdown.
Germany RevPAR declined 37%, due to fewer events during the quarter, absence of a major biennial trade fair in Jan 20 and occupancy plunge from Mar 20. Italy RevPAR declined 38% y-o-y due to the temporary closures from 13 Mar 20 (till early May-20) under the nationwide lockdown.
Management noted that discussions in Europe are now on a gradual loosening of lockdown measures from as early as Jun-Aug 20, but more confidently from Sep 20. In Germany, some shops have started reopening since 20 Apr 20.

The flow-through to the portfolio will be more impactful for Hotel Management Agreement (HMA) properties, most of which are overseas.
For Singapore, the Jobs Support Scheme (JSS) will subsidise payrolls for 75% of the first S$4,600 covering nine months.
For the UK and Germany, government subsidies range around 80% and 60-70% respectively, although there is still uncertainty over any extensions of such programmes.

On balance sheet, CDL Hospitality Trusts has cash reserves of S$104.2m (not including committed revolving credit facility). Liquidity can be improved when the net cash inflows from the divestment of Novotel Singapore Clarke Quay and W Hotel acquisition are completed in mid-Jul 20. Dividend payout is under review pending more visibility from 1H20 results.

We lower our existing 2020/21F DPU by 27%/6%, based on the following adjustments:
1. Master leases properties (including Singapore IPO portfolio, M Hotel, NZD Grand Millennium Auckland, Pullman Hotel Munich, Italy Hotel Cerretani Firenze-MGallery): We recognised only the base rent for the six-month period in 2020.
2. HMA properties. We factored in steeper RevPAR y-o-y declines of -47% to -60% (vs - 35% to -30% previously) in 2020 for those in Japan, UK, and Maldives to account for temporary closures (2-3months) and a softer ADR environment.
Maintain BUY. Our target price of S$1.32 (previously S$1.34) is based on DDM required rate of return: 7.5%, terminal growth: 1.0%).
See CDL Hospitality Trusts Share Price; CDL Hospitality Trusts Target Price; CDL Hospitality Trusts Analyst Reports; CDL Hospitality Trusts Dividend History; CDL Hospitality Trusts Announcements; CDL Hospitality Trusts Latest News.
Share price catalyts: Lifting of travel restrictions, and reduction in infection rates across Singapore, Europe and APAC.

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-27

SGX Stock Analyst Report BUY MAINTAIN BUY 1.32 DOWN 1.340