CDL Hospitality Trusts - DBS Research 2020-07-30: Strong Leadership To Steer Its Way Out Of Adversity


CDL Hospitality Trusts - Strong Leadership To Steer Its Way Out Of Adversity

  • CDL Hospitality Trusts (SGX:J85)'s 1H20 performance impacted significantly by global travel lockdowns.
  • Green shoots arising as hotels gradually open; Singapore hotels supported by Sponsor master leases.
  • Ability to rebound significantly once travel resumes in 2021 onwards.
  • Not a seller at 0.66x P/NAV, which is more than – 1 SD standard deviation of its 15-yr mean; BUY maintained.

CDL Hospitality Trusts's 1H20 DPU of 1.51 Scts is 63.7% lower y-o-y.

  • This come on the back of a 44.5% and 56% y-o-y fall in gross revenues and net property income to S$52.1m and S$29.7m respectively. CDL Hospitality Trusts’ hotel portfolio was impacted by the downturn in travel market arising from various government lockdown measures imposed amid the COVID-19 pandemic.
  • Most of the hotels in CDL Hospitality Trusts’ portfolio were closed from March 2020 on a temporary basis or operating at low occupancies with the exception for the New Zealand and Singapore hotels, where occupancies have been bolstered by demand for isolation purposes and border closures (Singapore hotels).
  • A majority of revenues (S$32.1m) came from the Singapore, New Zealand and Australia hotels, of which fixed rent rental income of S$22.7m helped to arrest the drop in revenues from the pandemic.
  • Portfolio RevPAR for the Singapore hotels fell 49% to S$78/night.
  • CDL Hospitality Trusts’ Europe and UK hotels were also impacted by hotel closures and cancellations of planned events resulting in RevPAR falling by c.79% in Italy and c.66% in Germany, and 68% in the UK.
  • NPI fell by a greater percentage and included an impairment of S$3.6m in relation to certain leases in its retail malls and European hotels.
  • With the fall in NPI and lack of capital top-up, CDL Hospitality Trusts reported a 63.7% fall in DPU to 1.51Scts.

Financial metrics-not stressed.

  • Despite the weak operating results, we saw stable operating metrics for the REIT. Overall gearing increased slightly to 37.1% with interest cover of 3.4x (vs 4.7x as of Dec 2019). Average cost of debt remained low at 1.9%.
  • While it is tough to ascertain the impact of the fair value of its portfolio given the pandemic, we understand that it will take up to a 25% drop in asset values before gearing inches higher to 49.3% but still within MAS’ regulatory limit of 50%. Given the lack of transactions in this climate, especially in its core market of Singapore, we believe that the decline in NAV should be within the -5% to -15% range purely based on impact on cashflows and forward growth assumptions in the valuers’ models.

Outlook :

Stay Home Notice scheme to benefit Singapore Hotels; staycation joy at The W Hotel and Orchard Hotel

  • Several of CDL Hospitality Trusts’s assets have benefited and will continue to do so under the government’s Stay Home Notice (SHN) scheme for returning Singaporeans, with these hotels pre-booked and occupancies are full. Coupled with the border closures, the hotels have also benefitted from demand from overseas workers whom have remained in Singapore.
  • With the government allowing staycations (subject to application) to start in Singapore, CDL Hospitality Trusts can offer the W Hotel and a wing at the Orchard Hotel to local staycation demand. While it is not expected to be a large part of overall business (10% of demand historically, potentially more at the W hotel), we view this positively as it will contribute to cashflows as these properties would otherwise be seeing low occupancies as the travel ban remains in Singapore.
  • With most of the Singapore hotels backed by a master-lease arrangement with Sponsor, M&C, we believe that downside from these hotels is limited and unlikely to turn into losses.
  • Claymore Connect, the adjourning retail mall next to Orchard hotel has a committed occupancy rate of c.74% and should deliver stable returns.

Australia: Stable with master lease in place; keep watch on the master lease expiry in April 2021

  • CDL Hospitality Trusts' Australian hotels will enjoy from the relaxation of interstate travel (except Victoria and Western Australia.
  • However, the largely fixed rental nature of its Australian hotels will mitigate any fall in contribution from this portfolio.
  • That said, we understand that this master lease will expire in April 2021. The Manager may then choose to enter into a new master lease arrangement or revert to a pure operating contract post this expiry. We have currently assumed the rental to be flat upon expiry.

Gradual re-opening of its hotels across its overseas markets

  • Europe: Most of CDL Hospitality Trusts’ hotels have been closed from March 2020 and we understand these will start to gradually re-open from July 2020 (Hilton Cambridge City Hotel) and August 2020 onwards (The Lowry Hotel in the UK and Hotel Cerrentani Firenze – MGallery in Florence). Its other hotel – Pullman Munich - has remained opened throughout the pandemic but is operating at a low occupancy rate.
  • Japan: Hotels remained opened but saw fairly significant fall in RevPAR due to the travel restrictions.
  • New Zealand: Its hotel in New Zealand was among the earliest to reopen and is expected to see stronger rebound among its overseas markets.
  • Maldives: Hotels that are likely to reopen later in the year will be its Maldives hotels - Angsana Velavaru & Raffles (Maldives) - which is most likely to trade poorly given the global travel ban.
  • Given its exposure to the leisure market which is unlikely to return so soon, the Manager anticipates that a re-opening of their resorts will likely be from 1Q21 onwards.

Not a seller at 0.66x P/NAV, BUY maintained, Target Price S$1.30

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.300 SAME 1.300