Despite facing impact from Covid-19 on all segments, City Developments Limited (CDL) is fixed on long-term recovery, with the hospitality sector expected to rebound after a vaccine is found, say analysts. PhillipCapital analyst Natalie Ong is maintaining “buy” on the company with a lower target price of $10.68 from $11.82 previously.

“Hotel operations accounted for 82% of decline in revenue due to closure of 28% of hotel inventory and lower revenue per available room (-56.6%) and lower sales value from few units sold from mass market projects in 1H2020 vs ultra-luxury projects in 1H2019,” writes Ong in an August 24 note. 

Ong notes that all segments of CDL were impacted by Covid-19, with losses in the hospitality segment expected to continue despite cost-cutting measures. The segment recorded a pre-tax loss of $208.2 million due to the temporary closure of 28% of the Group’s 152 hotels, $33.9 million in impairment losses on eight hotels (six in US, one in UK, and another in Europe), and $7.0 million in doubtful receivables for two hotels which have payment difficulties due to Covid-19.

“Global hotel occupancy fell to 39.4%. The management guided that losses for this segment are likely to continue for the rest of the year due to the muted global recovery in international tourism,” says Ong. 

See: CDL looks to list UK office REIT in 1Q2021; raises stake and support IREIT Global's rights issue

That said, CDL sold a “respectable” 356 units in Singapore in 1H2020 despite 10 weeks of showroom closures, down from 505 this time last year. Sales value was 68.8% lower at $514,700, down from $1.55 million in 1H2019, contributed by mass-market projects with lower margin, in contrast to the ultra-luxury projects sold in 1H2019. 

CDL replenished its landbank in Jan20 through the successful tender of the GLS at Irwell Bank (540 units, estimated to launch during 1H21). The Group will launch its joint venture (JV) project, Penrose Drive (566 units) in 3Q20. 

Ong also notes that CDL is unlocking additional GFA (gross floor area) through redevelopment of Fuji Xerox and Central Mall. Plans for Fuji Xerox Towers’ redevelopment includes a 25% gross floor area (GFA) uplift, with demolition works slated for 2H21. Plans for Central Mall include a 240,000 sq ft uplift in GFA, with a 70% commercial and 30% hotel or serviced apartment component. Plans for both developments are still pending approvals from the URA.

Under CDL, CDL Hospitality Trusts is a stapled group comprising HREIT, which invest in a portfolio of income-producing properties and HBT, a business trust. 

The hospitality trust is seeing optimism from the resumption of general travel between Singapore and Brunei and New Zealand, says RHB analyst Vijay Natarajan. Natarajan is upgrading the trust to “buy” from “neutral”, with a raised target price of $1.25 from $1.03 previously.

See also: CityDev 1H20 earnings plunge 99.1% to $3.1 mil

From September 1, visitors to Singapore from Brunei and New Zealand (1.2% of total visitors in 2019) can take a Covid-19 test upon arrival, without needing to comply with the mandatory 14-day stay-at-home (SHN) period. Also, the SHN period for visitors from Australia (excluding Victoria state), Macau, Mainland China, Taiwan, Vietnam and Malaysia will be cut to seven days. 

Singapore is also spending $45 million on a campaign to promote domestic tourism. While these steps will not likely result in a significant spike in demand, this calibrated easing of measures is an incrementally positive move. Demand for some CDLHT Singapore hotels (63% of FY19 net property income or NPI) is also supported by the Government bulk-booking contracts for 3Q2020 – as they will be used as dedicated SHN facilities.

Lease structures for its Singapore, New Zealand, Germany and Italy hotels have a fixed rental floor, which offers downside protection, says Natarajan. Its Australian hotels are largely on fixed rental rates. 

Among its overseas assets, Grand Millennium Auckland (12% of FY19 NPI) is expected to be impacted in 3Q2020, from the recent re-imposition of lockdown measures. CDLHT has also reopened its UK and Italian hotels, on some easing in domestic and inter-EU travel restrictions. Asset enhancements for its Maldives assets are also nearing completion, with a full opening expected in 4Q2020.

During a results briefing by CEO Sherman Kwek earlier this month, he said the group is exploring establishing a REIT listed on the Singapore Exchange for its commercial assets in UK and would most likely aim for a listing in 1Q2021.

As at 11.53am, shares in CDL are trading at 13 cents higher, or 1.62% up, at $8.13. Units in CDL HTrust are trading 3 cents higher, or 3% up, at $1.03.