CDL Hospitality Trusts - UOB Kay Hian 2020-11-02: 3Q20 Some Respite Amid Challenging Times


CDL Hospitality Trusts - 3Q20 Some Respite Amid Challenging Times

  • CDL Hospitality Trusts’s Singapore and New Zealand properties were relatively well supported by the isolation and staycation businesses, even as most of its overseas properties continue to see forward weakness (re-enacted curbs and a low seasonal fourth quarter in the UK and Europe).
  • CDL Hospitality Trusts has also divested Novotel Brisbane, given its expiring master lease and challenging operating conditions. It remains in a strong cash flow position to tide the storm.
  • Maintain HOLD on CDL Hospitality Trusts with a higher target price of S$1.02.
  • Entry price: S$0.93.

CDL Hospitality Trusts's 3Q20 Operational update.

  • At a teleconference call on 30 Oct 20, CDL Hospitality Trusts (SGX:J85)'s management said it saw continued demand in the isolation business in Singapore and New Zealand properties. Most of its other overseas hotels were operating at low occupancies or just re-opened in 3Q20.
  • CDL Hospitality Trusts's 3Q20 gross revenue and NPI grew 58.2% and 49.4% q-o-q respectively although they were still down 38.7% and 57.4% y-o-y. The quarterly improvement was due to the easing of COVID-19 measures (lockdowns, social distancing requirements) imposed by local governments, as well as reopening of all CDL Hospitality Trusts's hotels (except Raffles Maldives Meradhoo) between Jul and Aug 20.
  • There was also inorganic NPI contribution from W Hotel (acquired on 16 Jul 20) but this was more than offset by the absence in contribution from Novotel Clark Quay (NCQ) which ceased operations on 3 Jul 20.
  • Singapore RevPAR (excluding W Hotel) improved 8% y-o-y to S$64 due to continued demand for isolation facilities and the housing of foreign workers affected by border closures. Room occupancies for these five M&C hotels were sustained at high occupancies (almost 100% excluding out-of-order rooms) but at much lower ADR y-o-y, therefore still resulting in RevPAR decline of 60.9% y-o-y. Other non-room contributions were dragged by cancellations of major MICE events, wedding banquets and social functions.
  • Claymore Connect also saw lower NPI y-o-y on a lower committed occupancy of 79%, as well as extended rental reliefs and temporary tenant assistance.

Singapore outlook: Demand to be supported by staycation and isolation businesses, pending return of international travel.

  • As COVID-19 cases decline in Singapore, management opined that demand for isolation facilities may be tapering off with four of its six Singapore hotels contracted until early-21. Until then, the resumption of the staycation business has benefitted its W Hotel (acquired on 16 Jul 20) which has seen occupancy of 40-50% and ADR of mid-S$400 in 3Q20. If not for social-distancing requirements, management believes W Hotel could see a higher occupancy, and it has plans to fill more rooms to around 60% limit in 4Q20.
  • The staycation business is expected to see further boost from government handouts of S$320m to Singaporeans to spend on local hotel stays and attractions, from Dec 20 to Jun 21. In the interim, the government has struck travel bubbles (Hong Kong), bilateral (for essential and business purposes - China, Malaysia, Indonesia, Japan) and unilateral (New Zealand and Australia) travel arrangements with 10 countries.
  • Management has also lauded the unilateral arrangements as a step-forward in-opening, before other countries take reciprocal steps.

Most overseas hotels were affected

  • Most overseas hotels were affected, with y-o-y evPAR in local currency declines in Maldives (-95%), Italy (-91%), Germany (-78.5%), Japan (-74.7%) and the UK (-44%).
  • For Maldives properties, tourism demand has not returned despite the border re-opening on 15 Jul 20. Given the low occupancy at Angsana Velavaru and temporary closure of Raffles Maldives, both resorts are operating at highly reduced staffing.
  • CDL Hospitality Trusts’s Japan properties in Tokyo were affected by the limited international visitor arrivals, but may benefit from the “Go-to-Travel” campaign after Tokyo’s inclusion, which subsidises a substantial portion of travel expenses (including accommodation).
  • New Zealand hotel performance was insulated from the downturn with RevPAU improving q-o-q but remaining flat y-o-y due to the selection of Grand Millennium Auckland for the government’s managed isolation business. It also benefitted from the further extension of the government’s wage subsidy which reduced its operating expense.

UK and Europe properties to see weakness

  • UK and Europe properties to see weakness going forward, given the recently re-enacted curbs amid the virus resurgence and the low season in the fourth quarter. Otherwise, in 3Q20, Italy (Florence) and Germany (Munich) saw quarterly pick-ups but demand was still substantially down y-o-y. As a result, a collective S$2.4m impairment was recognised against the two hotels in 3Q20.
  • For UK properties, Hilton Cambridge City Centre (reopened on 1 Jul 20) saw a quick occupancy ramp-up from its domestic business and a long-staying project group, while Lowry Hotel (reopened on 1 Aug 20) was supported by the domestic leisure and limited sports and entertainment businesses. UK hotels also benefitted from the government’s furlough scheme to contain operating costs.

Gearing remained low at 36.7% (-0.4ppt qoq) with S$806m debt headroom (50% leverage limit).

  • On acquisitions, management alluded it has not seen any distressed deals. They opined that most sellers are selling holding out amid supportive relationships with its banks; suggesting that such deals may only come to the market in early-21.

Divestment of Novotel Brisbane for S$66.4m completed.

  • Management sees the divestment as an opportune time to exit the Brisbane market, given the expiry of its master lease in Apr 21 which would expose the property to challenging conditions from COVID-19 and new supply coming onstream. The sale price represented a 7% discount to its book value as at 31 Dec 19, but was still 0.6% and 6.9% higher than its recent independent valuation and original purchase price respectively. Accordingly, the sale is expected to see a 1.9% dilution to its 2019 pro-forma DPU, but a slight NAV accretion (+0.13%).
  • The S$61.4m net proceeds is also expected to come through after the 30 Oct 20 completion, which can be used to repay borrowings.

We raise our CDL Hospitality Trusts's 2020-22F DPU forecast by 1-3%

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | 2020-11-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.02 UP 1.000