Analysts are pleased with CDL Hospitality Trusts J85 ’ (CDLHT) following the REIT’s release of its 9MFY2023 results ended Sept 30.
RHB Bank Singapore analyst Vijay Nataranjan and CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept their “buy” and “add” calls at reduced target prices, while the team at DBS Research has kept both their “buy” call and target price.
RHB’s Natarajan has lowered his target price to $1.23 from $1.25 previously, while CGS-CIMB’s Ong and Lock have lowered their target price to $1.43 from $1.55 previously. Meanwhile, the team at DBS has kept their target price of $1.55.
RHB sees CDLHT’s recovery momentum as intact
According to Natarajan, CDLHT’s 3QFY2023 net property income (NPI), which stood at $39.0 million, slightly outpaced his estimates, as its Singapore hotel segment continues to recover strongly. During the quarter, four of CDLHT’s six hotels recorded new highs in revenue per available room (RevPAR).
The REIT’s increase in its 3QFY2023 and 9MFY2023 NPI was backed by strong growth from its Singapore, Italy, Germany and Japan hotels, with seven of these hotels recording their highest RevPAR in 3QFY2023. Notably, the NPI margin for 3QFY2023 improved to 55.7%, which is a 1.7 percentage point (ppt) growth y-o-y and 4 ppts growth q-o-q.
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“We expect this momentum to be sustained until 1HFY2024,” adds the RHB analyst.
However, Natarajan notes that interest cost pressures continue to be the key challenge for the REIT, which he expects to peak by 1HFY2024.
He writes: “We find current levels attractive from a medium-term perspective– it is trading at an above 30% discount to book value (BV).”
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Meanwhile, the CDLHT has also guided for a reduction in its Singapore portfolio’s utility expenses next year, as the contracted rates are around 30% below current spot rates.
The average interest cost year-to-date (ytd) rose 10 basis points (bps) to 4.2%, with only half of its debt currently hedged, which Natarajan notes is among the lowest in the Singapore REIT (S-REIT) space.
He writes: “On valuation, we expect its Singapore hotel portfolio value to edge up slightly, based on recent transactions. This should more than offset the foreign exchange (forex) weakness from its overseas assets.”
With an increased average daily rate (ADR) of 21.4% y-o-y driving the REIT’s Singapore hotel RevPAR growth of 20% y-o-y in 3QFY2023 or a 33% increase against its 3QFY2019 levels, Natarajan understands that CDLHT’s focus will likely shift towards a more occupancy-based strategy next year from a room-rate strategy.
“We expect a modest 3% RevPAR growth for next year, with ADR likely plateau-ing and occupancy levels set to improve slightly,” writes the analyst.
Visitor arrivals to Singapore have also recovered to 77% of 3QFY2019 levels, and visitor days are now at 86% of 3QFY2019 levels, due to an increase in the average length of stay to 3.8 days against 3.4 days previously.
As a result, Natarajan is optimistic on this front: “Overall, we expect visitor arrivals next year to reach around 95% of pre-pandemic levels, backed by a strong event pipeline calendar.”
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A large quarter for CDLHT’s overseas segments with all except Australia and Germany were booking healthy y-o-y RevPAR growth, with key performers Japan, New Zealand and Italy all seeing a y-o-y RevPAR growth of 102%, 81% and 40% respectively, to which the analyst attributes to strong tourism recovery from increased flight connectivity and pent-up demand.
He adds: “The outlook remains positive for most of its overseas markets, barring Maldives which faces supply and operational cost pressures and largely depends on Chinese high-end visitors returning to stay at its resorts there.”
Additionally, the REIT’s development of The Castings, a build-to-rent project acquired via a forward purchase agreement in Manchester, the UK, is on-track to be completed by mid-2024.
Residential rental rate growth in the market has also exceeded CDLHT’s expectations due to strong demand, with NPI yield upon completion expected to be slightly higher at around 6%.
Key drivers for CDLHT, in Natarajan’s view, include a strong recovery across its Singapore portfolio, aided by pent-up demand, a balanced mix of master leases with management contracts and as well as a strong and capable sponsor group. Conversely, key risks include the inflation and interest cost pressures, a sharp slowdown in the economy resulting in a demand slowdown, and finally, a slow recovery in corporate travel and outbound travel from Chinese visitors.
CGS-CIMB likes CDLHT as a hospitality recovery play
CGS-CIMB’s Ong and Lock notes that the REIT is seeing a more even, broad-based recovery, although its 9MFY2023 NPI fell short of their expectatoins at 65.8% of their FY2023 estimates. This was mainly due to the lower-than-forecast non-room revenue for CDLHT’s Singapore portfolio.
In their report, the analysts see CDLHT’s valuations as likely to remain stable despite a slight increase gearing of 38.4% as at Sept 30 from 37.9% in the last quarter. The higher gearing was due to loans drawn to fund the UK build-to-rent market (BTR) project which is 76% funded, while the average cost of debt increased 10 bps q-o0q to 4.2% in 3QFY2023, the analysts note.
Ong and Lock add that CDLHT has guided for its FY2024 cost of debt to be similar to its FY2023 levels, as the expiry of its interest rate swaps exceeds the FY2024 loan maturities.
To account for lower non-room revenue for the REIT’s Singapore assets, lower gross operating margins due to cost pressures and slightly higher cost of debt assumptions, the analysts have cut their FY2023 to FY2025 distribution per unit (DPU) estimates by 3.9% to 7.8%.
They write: “CDLHT is well-positioned to capture upside from its recent asset enhancements at Grand Copthorne and the strong UK BTR market, in our view.”
Re-rating catalysts by Ong and Lock include accretive acquisitions and divestments, while downside risks include a lower-than-forecasted demand for leisure and corporate travel, which could impact the REIT’s occupancy and room rates.
Upturn in MICE events to bode well for CDLHT’s Singapore hotels: DBS
Lastly, the team at DBS is pleased with CDLHT’ss performance for the 9MFY2023, noting that its NPI of $101.9 million is tracking in-line with their full-year estimates of $142 million.
Beyond the record 3QFY2023 RevPAR logged in seven of CDLHT’s portfolio hotels and better room demand for travellers in Singapore and Japan, the DBS team notes that the upturn in meetings, incentives, conferences, and exhibitions (MICE) events will bode well for CDLHT’s hotels in Singapore.
“Gearing remains at a comfortable 38.4% for the quarter, with an interest coverage ratio of 2.9x. Weighted average cost of debt rose 10 bps q-o-q to 4.2%, and expects cost of debt to be flat towards year end and marginally higher for FY2024,” says the DBS team.
“The next tranche of expiries will come into effect in 2HFY2024 with [around] 33% of total borrowings up for renewals. CDLHT is expecting utility cost savings y-o-y going into FY2024 on lower contracted rates,” they add.
As at 3.10 pm, units in CDL Hospitality Trusts are trading at 0.5 cents lower or 0.52% down at 96 cents.
