CDL Hospitality Trusts - UOB Kay Hian 2020-07-30: 2Q20 COVID-19-Challenged In Most Markets

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - 2Q20 COVID-19-Challenged In Most Markets

CDL Hospitality Trusts’ 1H20 DPU came in below expectations. Portfolio resilience was underpinned by master-leased SG, AUS, and NZ hotels (62% of revenue); SG and NZ RevPAR were also bolstered by the quarantine business. Otherwise, most overseas properties across the Maldives, UK, Japan, Italy and Germany saw weakness arising from lockdowns and travel restrictions.
Downgrade to HOLD with a lower target price of S$1.00 (previously S$1.32) given the limited upside.

CDL Hospitality Trusts (SGX:J85)'s 1H20 gross revenue and NPI saw respective declines of 44.5% and 56% y-o-y, due to temporary closures, or low occupancies across portfolio properties, with the exception of New Zealand and SG hotels which saw demand for accommodation facilities used for isolation purposes.
CDL Hospitality Trusts' 1H20 DPU of 1.51 S cents (-63.7%) forms 32% of our full-year estimates.
Despite the COVID-19 pandemic disproportionately affecting 2Q20, 1Q/2Q20 mix is only 60%/40% due to the minimum fixed-rent structure in its master-leased hotels. Pending more visibility at end-20, management may consider some capital top-ups.

While 1H20 occupancies of 68.2% (2Q20: 90s %) was supported by demand for isolation accommodation (eg Stay-Home Notice (SHN), government quarantine, and foreign workers affected by border closure), S$36.1 ADR (-36.1% y-o-y) was much lower due to lower contracted rates for block-bookings.
SG hotels performance was also affected by the absence of major MICE events, wedding banquets, and social functions.

Management guided that government contracts will still be substantial in (and extending beyond) 3Q20, despite the lack of visibility on end dates. On concerns that government may give back some rooms due to the underlying occupancies (ie 40-60%), management opined that the decision will also have to ensure sufficient buffer stock in case of subsequent waves, and a longer turnaround time for cleaning rooms.
Around half of Singapore’s hotel room inventory has been booked for quarantine purposes.

Management noted that Singaporeans spent c.S$34b on international travel in 2018, and this is a market that domestic tourism can partially capture with the Singapore Tourism Board’s S$45m marketing campaign to drive local tourism, which includes hotel staycation packaged with tours.
While most of CDL Hospitality Trusts’s SG portfolio is on government contracts, Orchard Hotel (656 rooms) and W Singapore Sentosa Cove (240 rooms) have been approved for staycations, with the latter seeing steady ADR (vs pre-COVID-19) and occupancies of 50% on weekends, potentially approaching breakeven by end-20.
Singapore has gradually re-opened its borders since Jun 20, starting with six Chinese provinces, followed by long-term pass holders and business travellers between SG and Malaysia (targeted for 10 Aug 20). Discussions are also underway with Australia, New Zealand, Japan, and South Korea.

Portfolio resilience underpinned by master-leased SG, AUS, NZ hotels, amounting to S$32.1m (62% 1H20 revenue), with fixed rent accounting for S$22.7m.
Revenue from Australia declined 4.1% y-o-y due to the weaker AUD. NZ RevPAR declined 32% y-o-y, but still yielded S$5.6m (including variable rent S$2.9m). NZ occupancy declined after its border closure resulted in visitor arrivals declining 44.1% during Jan-May 20, until it was bolstered by isolation business from the government.

Germany RevPAR declined 66.5%yoy, from the absence of two major trade fairs and conferences, lockdown measures and travel restrictions. Italy RevPAR also declined 79% y-o-y, incurring S$144m NPI loss. Its Italy hotel has been closed since 13 Mar 20 in line with nationwide lockdown.

Angsana Velavaru posted RevPAR decline (-44.6), due to weaker trading conditions with the ban of Chinese arrivals from early February, which cumulated into a blanket suspension of on arrival visas in Mar 20.
Raffles Maldives remained closed temporarily from 1 Apr 20 with its gestation disrupted by the pandemic.
Japan RevPAR declined 56.9%, due to travel ban and nationwide emergency from 16 Apr-end May 20, affecting demand during the Golden Week holidays. Japan is looking to begin discussions with 12 countries (including China, South Korea, SG) on easing restrictions.
Finally, UK RevPAR declined 68%, due to more than three months of temporarily closure as part of the lockdown measures. Both its UK hotels were affected by MICE event cancellations, while Lowry Hotel was also dragged by suspension of sporting events/and concerts.

A closed hotel under Management Contracts (HMA) typically still incurs S$1m/month in terms of fixed overheads. Management has plans to re-open Lowry hotel (in early August), Hotel Cerrentani Firenze (mid-August), Raffles Maldives (4Q20), depending on visibility in terms of forward bookings.

CDL Hospitality Trusts’s gearing increased 37.1% (+1.7ppt h-o-h), providing it S$777m debt headroom (before breaching the 50% limit). Management expects more distressed assets for sale closer to year-end.

Earnings trimmed for 2020-22F. We reduce our existing CDL Hospitality Trusts' 2020/21/22F DPUs by 20%/33%/23%, factoring in steeper RevPAR declines of -42% to -89% (vs -20 to -60% previously), and a more gradual recovery in 2021/22.
Downgrade to HOLD with a lower target price of S$1.00 (previously: S$1.32). Our valuation is based on DDM (required return: 7.5% and terminal growth of 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 catalyst: Positive newsflow on hotel room rates and occupancy, and tourist arrivals.

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-30

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.00 DOWN 1.320