On 28 July 2023, CDL Hospitality Trusts (“CDLHT”) have announced their half year result for 2023. As expected, their financials continue to improve now that we are in the post Covid-19 and are in recovery phase. CDLHT have been able to continue increasing their dividend payouts since 2021.
Keep in mind however that the current financial market environment has uncertainties. This may result in further share price depreciation. Especially as although the financials have improved from my previous article, share price have fallen as well with the rising interest rates.
Website: Financial Statements And Related Announcement::Half Yearly Results
Background
CDLHT is one of Asia’s leading hospitality trusts. 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.
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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | +23.0% | No Info |
For the first half of 2023, it was noted that there was an increase in DPU by 23.0% to SGD0.0251 per stapled unit from SGD0.0204 in the same period from the previous financial year. This metric was Favorable as there are signs of recovery from Covid.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | No Info | No Info |
Based on the announcement on 28 July 2023, occupancy rate was not included in the announcement.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 37.9% | 37.5% |
Gearing ratio stands at 37.9% as at 30 June 2023. This to me is considered Favorable as it is still a distance away from the MAS limit of 50%.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.2x | 3.5x |
The interest coverage for the trailing 12 months stands at 3.2 times. The overall metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and may worsen, especially as management have disclosed that there were higher funding costs on the Group’s floating rate loans and fixed rates loans that were re-financed at higher rates, as well as increased interest expense from amounts drawn to finance the Group’s asset enhancement works.
The Federal Reserve on 20 September 2023 have indicated that interest rates need to stay high for a longer period of time. This was after having increased the interest rates to a range between 5.00% and 5.25% on 26 July 2023, the highest level in 22 years. There is a possibility that long-term interest rates may see an increase over the next few months.
Website: Fed declines to hike, but points to rates staying higher for longer
As the interest rate may potentially increase further, CDLHT may be subjected to significant change in their cost of debt in the near future. There is no disclosure as at 30 June 2023, however in their presentation for 31 March 2023, they have mentioned that 55.5% of their debt is on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 June 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,129,000 |
| Debt Not Hedged (%) as at 31 March 2023 | 44.5% |
| Debt at Floating Rate Exposed | $502,405 |
| Distributable Income FY2022 | $69,700 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$2,512 | -3.6% |
| + 100 bps | -$5,024 | -7.2% |
| + 150 bps | -$7,536 | -10.8% |
| + 200 bps | -$10,048 | -14.4% |
| + 250 bps | -$12,560 | -18.0% |
| + 300 bps | -$15,072 | -21.6% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 2.1 years | 1.9 years |
Weighted average term to maturity of their debt stands at 2.1 years as at 30 June 2023. This is Neutral as it has been hovering around the 2.0 year mark.
Many thanks to REIT-TIREMENT for finding the information of Debt Maturity Profile and detailing in his website. You can check out his hospitality trusts comparison in the link below.
Website: Hospitality Trusts Comparison @ 14 September 2023
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.72 | 0.82 |
The Price to Book (“P/B”) ratio currently stands at 0.72. This is computed using the closing share price of SGD1.02 on 6 October 2023 and the net asset value per share of SGD1.41 as at 30 June 2023. The P/B ratio is Favorable.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 5.98% | SGD 0.061 |
| 2022 | 5.00% | SGD 0.051 |
| 2021 | 4.57% | SGD 0.047 |
| 2020 | 6.25% | SGD 0.064 |
| 2019 | 8.93% | SGD 0.091 |
| 2018 | 9.25% | SGD 0.094 |
With the dividend payment in August 2023, total dividends paid for 2023 amounted to SGD0.061 per share which is higher than my expectation in the previous article. With a closing share price of SGD1.02 as at 6 October 2023, this translates to a dividend yield of 5.98%.
For my benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. While CDLHT has been recording an uptrend in dividend payout, the current high dividend yield is mainly due to the share price falling, especially as interest rates increase. Nonetheless, the hospitality sector is expected to continue improving over the next few quarters.
Website: Reasonable Dividend Yield 2023Q4
As CDLHT is trading close to the lower range of my benchmark, for illustration if using dividend yield of 7.0% as a benchmark, based on the dividend of SGD0.061 there is potential for CDLHT to see its share price drop by 21.6% to SGD0.80. Investors will thus need to be mentally prepared that the share price might further fall should the required return reaches those levels.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.98%) | 1.02 | – |
| 6.00% | 1.02 | – |
| 7.00% | 0.80 | -21.6% |
| 8.00% | 0.70 | -31.4% |
| 9.00% | 0.62 | -39.0% |
The dividend yield is Neutral.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +23.0% | Favorable |
| Occupancy | No Info | N/A |
| Gearing Ratio | 37.9% | Favorable |
| Interest Coverage | 3.2x | Unfavorable |
| Debt Maturity Profile | 2.1 years | Neutral |
| Price to Book Ratio | 0.72 | Favorable |
| Overall | | Favorable |
Overall, the metrics indicate that it is favorable to invest in CDLHT. However while the financials are favorable, there has been an increase in uncertainty in the market which resulted in the share price to have fallen since my previous article. It may be possible for share price to continue on a downtrend, which will provide 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 investments.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: CDL Hospitality Trust (SGX: J85): 2023 First Quarter Business Update
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