CDL Hospitality Trust (SGX: J85): 2022 Third Quarter Business Update

On 28 October 2022, CDL Hospitality Trusts (“CDLHT”) have announced their third quarter business update. Overall I can see that they have not fully recovered from Covid-19 and the share price does not see significant changes as investors play a waiting game to see what happen over the next few months.

Website: General Announcement::Operational Update for the Third Quarter and Nine Months Period Ended 30 September 2022


Background

CDLHT is one of Asia’s leading hospitality trusts with assets under management of about SGD2.9 billion as at 30 September 2022. It comprises CDL Hospitality Real Estate Investment Trust (“H-REIT”), a real estate investment trust, and CDL Hospitality Business Trust (“HBT”), a business trust. CDLHT was listed on the Mainboard of the Singapore Exchange Securities Trading Limited on 19 July 2006, with H-REIT being the first hotel real estate investment trust in Asia (ex Japan).

H-REIT’s principal investment strategy is to invest in a diversified portfolio of income-producing real estate, which is primarily used for hospitality, hospitality-related and other accommodation and/or lodging purposes (including, without limitation, hotels, serviced apartments, resorts, motels, other lodging facilities and properties used for rental housing, co-living, student accommodation and senior housing) globally.

HBT’s principal investment strategy is to invest in a diversified portfolio of real estate or development projects, which is or will be primarily used for hospitality, hospitality-related and other accommodation and/or lodging purposes (including, without limitation, hotels, serviced apartments, resorts, motels, other lodging facilities and properties used for rental housing, co-living, student accommodation and senior housing) globally and may also include the operation and management of the real estate assets held by H-REIT and HBT.

As at 30 June 2022, CDLHT’s portfolio comprises 19 operational properties (including a total of 4,821 rooms and a retail mall) and one build-to-rent project in the pipeline with 352 apartment units.

CDLHT is managed by M&C REIT Management Limited and M&C Business Trust Management Limited, subsidiaries of Millennium & Copthorne Hotels Limited, an internationally recognised hospitality group, which owns and operates hotels globally.


Key Metrics

Distribution Per Unit (“DPU”)

Based on the announcement on 28 October 2022, DPU was not included in the business update for the third quarter of 2022.

Occupancy

Based on the announcement on 28 October 2022, occupancy rate was not included in the business update for the third quarter of 2022.

Gearing ratio

Gearing ratio stands at 39.4% as at 30 September 2022. As of now, this to me is considered Neutral as while there is sufficient headroom from the MAS limit of 50%, their high gearing results in significant interest and less room to navigate as the hospitality sector recover from Covid-19.

Interest coverage

The interest coverage for the trailing 12 months stands at 3.7 times. This is not surprising given that the hospitality sector has not fully recovered from Covid-19 and their earnings are still at low levels. This is a concern as interest rates continue to rise as the world looks to tackle inflation, and the Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to at least 4.75% by end of 2022.

Website: Fed to lift rates by 50 basis points, but peak policy rate may be higher

The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen.

As the interest rate may potentially increase further, CDLHT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 64.4% of their debt is also on fixed rates.

I have thus performed a sensitivity analysis using the information as at 30 September 2022:

Interest rate sensitivity analysis as below:

Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, CDLHT may experience a fall in DPU accordingly. Due to their lower earnings as compared to the other sectors, any further increase in interest rates will have a more pronounced impact on their distributable income. Something investors should take note of.

Debt maturity profile

Weighted average term to maturity of their debt stands at 1.7 years as at 30 September 2022. This is Unfavorable. Their current blended cost of debt is 2.5% which is significantly lower than the current interest rates in the market. My expectation is that the high interest rates will only drop around 2 years later. This may cause CDLHT to have to re-finance their debt soon at rates that are unfavorable which will in turn worsen the other metrics.

Website: Feds’ latest rate hike has experts pondering if mortgage rates will drop in ‘another year or two’

Price to Book Ratio

The Price to Book (“P/B”) ratio currently stands at 0.95. This is computed using the closing share price of SGD1.24 on 24 November 2022 and the net asset value per share of SGD1.31 as at 30 June 2022. The P/B ratio is Favorable.


Dividend yield

At 24 November 2022, with a closing share price of SGD1.24 and dividend payout of SGD0.051 for the full calendar year 2022, this translates to a dividend yield of 4.11%. The dividend yield is Unfavorable. For my REIT’s benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. CDLHT lower dividend yield is not unexpected given that the hospitality sector have not recovered as compared to the other sectors.

However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of other REITs to become unfavorable and the REITs saw a decrease in their share price to provide higher dividend yields.

Website: Reasonable Dividend Yield Changes

CDLHT did not saw a significant decrease in share price recently unlike the other REITs. This is due to the hospitality sector continues to be affected and CDLHT share price had not seen a significant price appreciation in the last 2 years since the market crash in March 2020. This suggests that investors have found a strong price support at the current levels to ride for the long-term recovery.

However, if CDLHT is unable to improve their financials in the near future, it is possible for investors to lose confidence in the REIT, especially as interest rates for safe assets in Singapore approaches to cross 4%. If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.051 there is potential for CDLHT to see its share price drop by 41.2% to SGD0.73. Investors will thus need to be mentally prepared that the share price might further fall.

The dividend yield is Unfavorable.


Key Things to Note

China Lockdown

Although they do not have assets located in China as compared to the other REITs, hospitality sector relies on China tourists, being one of the major markets, to generate revenue. China’s continue travel restrictions for Covid-19 reduces travelers overseas which indirectly affects the operational performance as the hospitality sector. The result is that the hospitality sector continues to be a laggard in recovery and may continue to do so in 2023 unless there are signs of change towards China’s zero-Covid policy.

Website: China’s Covid lockdowns snuff out ‘on-a-whim’ travel, leaving domestic tourism in tatters

Recession

There have been pent up demand to travel and thus when given the opportunity, tourism picked up in 2022 when restrictions for major economies have loosen. However, major economies around the world are also facing recession concerns. This will continue to slow the hospitality sector’s recovery from Covid-19 as consumers around the world continue to tighten their spending and may hedge their bets by revising their plans slightly by choosing cheaper options. This in turn will indirectly lower revenue for the hospitality sector as although the volume increases, the spending per unit decreases.

Website: How a Global Recession Might Impact Travelers and the Travel Industry


Summary

Overall, the metrics indicate that it is unfavorable to invest in CDLHT. The hospitality sector continues to be one that is plagued from the effects of Covid-19, making it difficult for them to provide favorable results. Especially when their debt is concerning and may require attention in 2023.

However, it also provides opportunities for investors to buy the shares at cheaper prices with the view that the hospitality sector may recover in due course. CDLHT is a higher risk higher reward investment where investors may be able to higher earn capital appreciation and increased dividend payouts as compared to the other investors.

Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.