Category: CDL H-Trust
SREITs – DBSV
Refinancing Risk to surface
- Refinancing risks as SOR rate rises
- Acquisitions to complement modest organic outlook
- Picks MAGIC, MCT, FCOT and CDL HT
Refinancing to cost more. The recent increase in the benchmark 10-year yield to 2.3% and 30-50 bps rise in the 3-month/3-year swap offer rates (SOR) could cap upside to S-REIT unit prices. Although most S-REITs have hedged the bulk (estimated 75%) of their debt at fixed rates, these will start to expire starting 2015 and they would be more expensive to roll over. We estimate a 1% hike in the refinancing rate on debt renewals in 2015 and 2016 would reduce distributions by an average of 2.0% (ranging from 0.0% to 5.6%). This suggests average FY16F yield might dip as much as 15 bps to 6.05%, and there would be only marginal growth this year. As refinancing risks rise, we may see limited upside for S-REIT unit prices from current levels.
Modest 4% growth in distributions over FY15-16F. The outlook guidance for 2015 remains modest for most sub-sectors with estimated c.4% growth in distributions over FY15-16F. Retail REITs remain cautious of the rental outlook amid rising occupancy costs as average portfolio tenant sales remain static. Industrial REITs continue to see acquisitions as rental growth moderate due to the competitive operating environment. For office REITs, the squeeze in CBD space remains a key catalyst for landlords to remain optimistic of near-term rentals, and we are seeing demand flowing into the business park sub-sector (both A-REIT and MINT saw back-filling of vacant space at Changi Business Park). Despite a better outlook for 2015, Hospitality REITswill see near-term weakness but remain optimistic that a strong line-up of events in Singapore this year will improve tourist arrivals. Most are looking outside Singapore for opportunities.
Acquisition-led growth partly funded by new equity. Supported by conservative c.33% gearing and ample access to capital, most S-REIT managers can continue to gear up for growth. But we are cautious of rising gearing levels at the start of an interest rate upcycle. The S-REITs are currently trading at 1.1x average P/Bk NAV, which suggests the managers may partly fund acquisitions by raising new equity, so as not to dilute NAV substantially. Sponsored REITs and industrial/hospitality REITs offer stronger visibility in termsof acquisition-led growth.
Picks. The current yield spreads, at 3.7%, are close to historical trading levels. Hence, we see limited upside to S-REIT unit prices going forward. Our top picks are REITs with strong growth potential like MAGIC, MCT, FCOT and CDL HT.
CDL H-Trust – OCBC
Softness to prevail in near term
- 4Q14 DPU +7.2% YoY
- FY14 Singapore RevPAR down 1.6%
- Ample debt headroom for acquisitions
4Q14 results met the street’s expectations
CDL Hospitality Trusts (CDLHT) reported its 4Q14 results which were in-line with the street’s expectations. Gross revenue and DPU rose 14.4% and 7.2% YoY to S$45.1m and 3.13 S cents, respectively, underpinned by the recognition of a full quarter’s hotel revenue from Jumeirah Dhevanafushi amounting to S$5.4m. FY14 gross revenue came in at S$166.8m (+12.1%), while DPU was flat at 10.98 S cents (+0.1%). This formed 103.1% and 99.8% of Bloomberg consensus’ projections, respectively.
Market conditions still challenging
Although CDLHT managed to record a 3 ppt growth in its Singapore hotels’ occupancy to 90% in 4Q14, competitive pressures from higher supply of hotel rooms and a cautious corporate spending environment resulted in a 4.7% decline in its average room rate to S$205. Hence RevPAR was down 1.1% to S$185. For FY14, CDLHT’s Singapore hotels saw a 1.6% dip in RevPAR to S$188. We expect market conditions to remain challenging in the near future, given the uncertain macroeconomic landscape. We believe the situation is further exacerbated by the weak Euro and Japanese Yen, which have drawn tourist arrivals to those areas. There is also an expected addition of 3,258 hotel rooms (+5.7%) to the Singapore market in 2015, and this would exert more pressure on room rates.
Maintain HOLD
Looking ahead, CDLHT will continue to focus on finding suitable acquisition opportunities in the hospitality sector, with Japan and Singapore being the key areas of interest. Its healthy gearing ratio of 31.7% (as at 31 Dec 2014) implies that it has sufficient debt headroom of S$339m to finance prospective acquisitions before reaching the 40% gearing level. Following a change in analyst coverage, we fine-tune our assumptions and derive a new fair value estimate of S$1.76 (previously S$1.80), based on our dividend discount model (discount rate: 8.4%, terminal growth rate: 2%). Maintain HOLD.
CDL H-Trust – OSK DMG
No Signs Of Recovery YTD
CDL Hospitality Trusts’ 3Q14/9M14 DPU dropped 1.1%/2.4% to 2.61/7.86 cents respectively. We assume coverage with a NEUTRAL and DDMderived SGD1.76 TP (from SGD1.63), a 3.5% upside from its current share price. With headwinds facing both the demand and supply side of the tourism industry not abating, we see limited growth prospects over the next two years for this stock.
- Results in line, 9M14’s distribution per unit (DPU) at 73% of our forecast. CDL Hospitality Trusts posted 11.9%/11.3% YoY rise in 3Q14/9M14 revenues to SGD40.1m/SGD121.7m respectively, aided by its Maldives resort acquisitions. DPU dropped 1.1% to 2.61 cents (3Q14) and 2.4% to 7.86 cents (9M14), partly on weaker Chinese tourist arrivals to Singapore, the Claymore Link mall’s ongoing refurbishments and the Maldives’ Jumeirah Dhevanafushi resort’s operating expenses not matched by its topline. Management earlier attributed this on seasonality, as 2Q/3Q was the resorts weakest quarters, with >70% of revenue contribution coming in 1Q/4Q on higher-yielding tourists from China, Europe and Russia. The trust’s YTD Singapore hotels revenue per available room (RevPAR) fell 1.6% YoY to SGD188, as the corporate and meetings business remained affected by tight travel budgets and the drop in Chinese tourists post China’s “forced shopping” ban in Oct 2013.
- Tourism outlook unlikely to turn around in 2014. For the first 21 days of October, RevPAR for Singapore hotels decreased by 3.5%, vis-à-vis the same period in 2013, despite the 2014 Women’s Tennis Association Championships being held here. Along Orchard Road, Shangri-La Hotels and Resorts opened the 502-room Hotel Jen Orchardgateway on 15 Sep with an introductory room rate of SGD250/night. Thus, we remain wary of the near-term competition of CDL Hospitality Trusts’ Orchard Hotel.
- Eyeing the Maldives. We expect the Maldives portfolio, ~10% of total net property income (NPI), to drive the major bulk of the trust’s 4Q14 DPU. Industry room inventory will probably continue to grow in Singapore with another 447 rooms slated for opening by end-2014. In 2015, an estimated 3,229 rooms are expected to open, further increasing room supply by 5.7% vis-à-vis 2014. The new room supply is likely to perpetuate the competitive environment going into 2015. We forecast 1% DPU CAGR over 2013-2016. We assume coverage with a NEUTRAL call and a DDM-derived SGD1.76 TP (from SGD1.63).
CDL H-Trust – CIMB
A turnaround quarter
CDL-HT’s 9M14 results are in line with our estimate, with revenue coming in at 74% of our full-year forecast and DPU accounting for 72%. On the back of a remarkable 92% occupancy for its Singapore portfolio, CDL-HT achieved a slightly higher RevPAR of S$192 (+0.5% yoy) this quarter. With the variable income from Angsana Velavaru to be booked in 4Q and the decline in visitor arrivals from China stabilising, we reiterate our Add call and target price of S$1.88 as we expect CDL-HT to deliver a stronger 2H14 earnings.
Stable quarter
CDL Hospitality Trusts (CDL-HT) posted a gross revenue of S$40.1m (+11.9% yoy) and DPU of 2.61 Scts (-1.1% yoy) for 3Q14. This set of results is in line with our estimates, with revenue and DPU accounting for 24% of our full-year forecast. The higher revenue was mainly attributed to the recognition of the hotel revenue of Jumeriah Dhevanafushi (acquired on 31 Dec 2013) and higher occupancy (92%) for its Singapore hotel portfolio. However, this was offset by the operational cost of Jumeriah Dhevanafushi and higher interest cost, resulting in a 1.1% yoy dip in DPU.
Marking a turnaround
Although this quarter’s result is uninspiring at first glance, stripping out the earnings and costs associated with Jumeriah Dhevanafushi reveals that CDL-HT’s hotel portfolio sustained its earnings yoy. Compared to the 5.1% dip in NPI in 1H14, this quarter’s results show a respectable turnaround of the portfolio’s performance. We expect the Singapore hotel market to remain stable in 4Q due to the holiday season and six international sporting events to be held at Sports Hub in 4Q14. With another 447 hotel rooms (c.0.8% of total supply) scheduled for opening by year-end, the supply of new hotel rooms in FY14 is manageable.
Maintain Add
With Angsana Velavaru’s variable rent (c.S$3.1m in FY13) due to be recognized in 4Q and the decline of Chinese visitors to Singapore (-27.4%/-28.2% in July/August vs. -47.1% in 1H14) stabilising, we remain confident that CDL-HT will post stronger results in 2H14 than in 1H14. Currently trading at 7.1% FY15 dividend yield vs. the REITs’ sector average of 6.9%, we do not find CDL-HT’s valuation aggressive and have maintained our Add rating and TP of S$1.88.