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SINGAPORE (Apr 21): While the hotel industry has been hit by a slowdown in travel arising from the Covid-19 pandemic, strong fundamentals and pent up demand has seen analysts express cautious optimism that CDL Hospitality Trusts (CDREIT) will successfully weather the crisis. 

While CDREIT’s local hotels -- which comprise 65% of its asset portfolio -- remain open, all onsite facilities have been closed until May 4, as part of Singapore’s circuit breaker measures. The measures may be further extended owing to an uptick in Covid-19 cases this month. Although, there has been some consistent demand for rooms, as the government has booked the hotels as accommodation for returning travellers serving as their 14-day stay-at-home notices. 

Exposure to overseas markets, however, has meant that the company’s REIT earnings will nevertheless be significantly affected in the coming year. 

“With strict restrictions on travel, quarantines and complete lockdown of cities imposed across various markets in which CDREIT operates, most of its overseas properties (UK, Germany, Italy, Australia, and New Zealand) are either closed on a temporary basis or operating at low occupancies. Management therefore expects an adverse impact on its earnings for 1H20, and an uncertain outlook beyond that,” said RHB analyst Vijay Natarajann. 

This uncertainty has caused RHB to maintain its “neutral” call and cut its forecasted distribution per unit (DPU) for FY20-21F by 48%, 25% and 15% to factor in lower occupancy and room rates. The research house has also raised cost of equity by 150 bps to 9.2%, factoring in higher risks associated with further economic disruption in the wake of the pandemic. Target price has been reduced from $1.62 to $1.03.  

Despite the global uncertainty and slackening demand, CDREIT is unlikely to face cash flow woes in the coming year. The firm enjoys a low gearing ratio of close to 37.3% -  which is likely to fall further to 35% for FY20-21F following the divestment of Novotel Singapore Clarke Quay and the acquisition of W Singapore Sentosa Cove. 

CDREIT also enjoys a robust balance sheet, with 55% of its borrowings in the form of fixed interest rates as of 31 December 2019, moderately insulating it from rising interest rates. The firm also possesses cash reserves of $100 million and $1.5 billion unused financing facilities, placing it in a strong financial position to weather the pandemic. 

Additionally, CDREIT enjoys downside protection from a fixed rent floor lease structure in its Singapore, Australia, New Zealand, Germany and Italian properties that provide base rental protection when the market goes South. These fixed rent floors currently amount to around $53 million -  half of RHB’s FY20 forecasts - mitigating the weaker demand for accommodation. 

In addition to these positive signs, DBS Group Research anticipates a quick medium-term rebound in FY21F due to pent-up demand for travel from individuals and corporates. The postponement of the Tokyo Olympics to 2021 as well as asset enhancement initiatives to the Copthorne King’s hotel and and CDREIT’s Maldives assets could see the counter grow at  a compound annual growth rate (CAGR) of 2.5% from 2022. RHB expects room occupancy rates to rise from 50-60% in FY20 to 70-75% in FY21. 

“CDREIT offers one of the cheapest exposures to the upturn in the Singapore market,” commented DBS analyst Derek Tan,“The implied price per key for CDREIT’s Singapore portfolio stands at close to $500,000 at the current share price of 94 cents, below asking prices for hotels in Singapore which are in excess of $1 million per key.”

Considering the mid-tier to luxury category of CDREIT’s portfolio and the REIT’s successful track record, Tan estimates conservatively that CDREIT’s Singapore portfolio should trade closer to $650,000 at a price/book value (P/Bv) of 1.0x. 

DBS maintains its buy call on CDREIT and recommends a target price of $1.30: an upside of 36% from current levels. It also expects attractive yields on a normalised basis as revenue per available room rebounds to normalised levels in FY22F. DPU is anticipated to stay at 4.7% for FY20F before rebounding 8.3% in FY21F, 2 per cent higher than mean yields of 6.2%. 

Investors should beware, however, the potential of higher interests rates to reduce DPU. Expansionary monetary policy could also see widespread currency depreciation relative to the Singapore dollar, potentially reducing DPU since CDREIT generates a significant portion of its income in foreign currency. Economic shocks or a prolonged crisis could also negatively impact DPU. 

As of 2.30pm, CDL Hospitality Trust is trading at a price of 94 cents. This is associated with a price-to-earnings (P/E) ratio of 10.22 and a dividend yield of 10.29%.