Hospitality trusts are a tad more challenging to manage than REITs of industrial, data centre and even healthcare and office properties. For one, there may be more wear and tear with hotels and owners having to regularly deploy capex to smarten their hotels.
Most recently, after Hilton Singapore Orchard, which is owned by OUE Commercial REIT, underwent extensive renovations, average day rates hit $500. Elsewhere, The Grand Hyatt is closed for major renovations and Far East Hospitality Trust’s (FEHT) Orchard Rendezvous Hotel has had something of a facelift.
Secondly, by nature, hospitality trusts are more volatile in terms of their distributions per stapled security (DPS) than other types of REITs and property trusts, which have longer weighted average lease expiry (WALE) profiles. This is because most hotel guests stay a few nights. Serviced residences are a longer-stay segment but even then, their length of stay averages months rather than years.
To lessen this volatility, hospitality trusts lean on their sponsors for master lease rentals or leases that have a component of minimum or guaranteed rent.
Often, sponsors step up to the plate and assist in taking the edge off capex, in particular, if the sponsor manages and operates the hotels. In January, CapitaLand Ascott Trust (CLAS), which owns the Riverside Hotel Robertson Quay, announced it will be refurbished and rebranded to The Robertson House by The Crest Collection. The Crest Collection is one of CapitaLand Investment’s (CLI) brands.
Far East Organization, the sponsor for FEHT, is a supportive sponsor. In FY2022 ended December 2022, FEHT’s master lease rents contributed around 82% to total revenue. Still, in its results statement, FEHT’s manager indicated that its serviced residences performed above their fixed rate rents in FY2022. On the other hand, hotels contributed 70% to gross revenue in FY2022, followed by serviced resistances with only 17% and the remaining from commercial ventures.
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Unlike Far East Organization, CDL divested 144 million CDL Hospitality Trusts’ (CDLHT) stapled securities to its shareholders to deconsolidate CDLHT’s debt from CDL’s balance sheet. This would enable CDL to sell some of its hotel properties to CDLHT.
CDLHT’s floating debt
Despite strong figures in FY2022 ended December 2022 owing to a global tourism recovery, analysts are divided on CDLHT. Chief among their concerns is CDLHT’s high proportion of floating debt amid rising interest cost expenses.
CDLHT is a stapled group comprising CDL Hospitality Real Estate Investment Trust and CDL Hospitality Business Trust. In FY20222, CDLHT’s revenue grew 45.4% y-o-y to $229.4 million, thanks to the recovery in global travel.
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Net property income (NPI) increased by 43.7% y-o-y to $123.7 million, bringing DPU up 31.9% y-o-y to 5.63 cents. Its DPU of 3.59 cents for 2HFY2022, up 17.3% y-o-y, was topped up with 1.02 cents in capital distributions. In comparison, CDLHT’s pre-pandemic DPU in FY2019 was 9.02 cents.
Save for New Zealand and Japan, revenue per available room (RevPAR) for CDLHT’s hotels in its other six markets recovered beyond pre-pandemic levels in 4QFY2022. By property, 13 of CDLHT’s 17 hotels have surpassed 4QFY2019 RevPAR.
Overall portfolio value has also recovered. As at Dec 31, 2022, CDLHT’s portfolio valuation increased 6.3% y-o-y, or $166.3 million, to $2.8 billion, mainly due to the growth in valuation of the Singapore portfolio, the acquisition of Hotel Brooklyn in February 2022 and build-to-rent (BTR) project The Castings in Manchester, UK.
Capitalisation rates rose slightly between 0 and 50 basis points (bps) across markets. They were stable in Singapore, compressed by 75 bps in the Maldives and expanded by 25 bps and 150 bps in the UK and Australia, respectively.
Hotels across various cities have seen cap rates expand slightly but not by a huge amount, says Mandy Koo, CDLHT’s head of investments and investor relations. “I think valuers take the view that interest rates are going to stay high for a very long period, so they also are not very keen to increase cap rates for valuations very quickly by big amounts unless they see transaction data.”
But that data is lacking in many markets, says Koo to The Edge Singapore. “So, valuers are not really expanding cap rates by huge amounts, at least not in hospitality.”
China returns, but slowly
Chinese tourists may be returning to the skies, but CDLHT CEO Vincent Yeo bemoans tight air capacity and logistical delays. “It’ll take time to move airlines back, to get pilots. Also, a lot of mainland Chinese passports have expired. This announcement came as a surprise to everybody, so I guess passport and visa applications will take a bit of time.”
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OCBC Investment Research analyst Chu Peng thinks CDLHT will only see a material rebound in Chinese tourists from 2Q2023, “given the airlines’ capacity constraints”.
Recessionary risk in other markets also threatens this recovery, adds Chu, as Europe and the UK made up some 20% of CDLHT’s FY2022 NPI. Citing concerns over higher interest rates and CDLHT’s low hedge ratio, Chu recommends investors “hold” on CDLHT with a target price of $1.38.
RHB Group Research analyst Vijay Natarajan thinks the reopening of China is already priced in for CDLHT, with its unit price having risen 25% over the past three months. “It is also most exposed to rising interest rates, due to low hedges and half its debts expiring in FY2023–FY2024.”
Only 56% of CDLHT’s debt is on fixed interest rates, one of the lowest figures among the S-REITs, says Natarajan. In a Jan 31 note, he remains “neutral” on CDLHT with a higher target price of $1.25 from $1.15 previously.
“Every 100 bps increase in its interest cost could shave DPU by 0.86 cents,” writes the RHB analyst. “In addition, it has 22% and 28% of debt expiring in FY2023 and FY2024 [respectively], which we expect to be rolled over at interest rates of slightly above 4%.”
CDLHT CFO Annie Gan believes floating rates for the Singapore dollar and British pound will ease “perhaps in 2H2023”. The REIT will lock in debt “opportunistically” when rates come off, says Gan, with a targeted “sweet spot” of between three and five years.
With CDLHT’s rise in valuation in FY2022, its gearing fell to 36.6% from 39.1% the year prior. RHB’s Natarajan thinks the REIT could tap equity on the back of the recent share price run-up. “Management noted that potential acquisition opportunities are mostly overseas (the UK, Japan), with over-leveraged buyers likely to offload.”
At the release of CDLHT’s results for 3QFY2022 ended September 2022, The Edge Singapore asked if CDLHT would consider expanding within its single-asset markets, like Germany. Then, CEO Yeo indicated a preference for hotels in Germany. “We’re still open to hotel investments, student accommodation and BTR projects … The challenge is a high interest rate environment, where the euro borrowing costs have also increased.”
Now, Yeo likes Europe and Singapore. “Obviously, [among the] hotel and asset owners that are refinancing, most have seen the interest coverage ratios and loan-to-value [LTV] deteriorate … If they are more accessible on the marketplace and each one goes under pressure, perhaps it may give rise to interesting opportunities. So, it could be in any of those segments.”
Deterioration in valuations in Europe would also impact CDLHT’s own portfolio, which has Pullman Hotel Munich accounting for 5.3% of its portfolio valuation and Hotel Cerretani Firenze (2% of AUM). Its four properties in the UK (including the upcoming BTR The Castings) accounted for 9.2% of the portfolio.
An acquisition on the cards is located just along the Singapore River. In 2019, CDL, CapitaLand and CLAS teamed up in a joint venture to redevelop the former Liang Court site into an integrated development with a fresh 99-year lease.
The new Canninghill Piers development will contain four major components: Canninghill Piers (residential), Canninghill Square (commercial), Moxy Singapore Clarke Quay (a hotel operated by Marriott International) and a serviced residence.
CDLHT has a forward purchase agreement for the Moxy hotel, which is expected to be completed “towards the end of 2025”, says Koo.
Moxy will add some 475 keys to CDLHT’s portfolio. The REIT will pay either a fixed price of $475 million or 110% of development costs, after taking into account the developer’s return, whichever is lower.
Compared to the REIT’s progressive funding for UK BTR project The Castings, CDLHT will pay a lump sum for the local development. That said, Koo notes a gap of more than one year between the completion of The Castings in 3Q2024 and Moxy.
CDL is the parent company of CDLHT’s sponsor, Millennium & Copthorne. Given the strength of the tourism recovery, could the REIT’s sponsor have more in the pipeline for its managers?
Yeo says CDLHT’s sponsors are “very open” to discussions. “Our sponsors have also announced that they want to do more collaborations with us so I think a lot really depends on the interest rate environment. The key is for us to be able to make acquisitions yield-accretive. In general, the environment for acquisitions will be constrained by that.”
UK vs Singapore
What do CDLHT’s managers see in the UK BTR project? As of December 2022, CDLHT has funded GBP30.2 million ($48.18 million) out of the maximum commitment sum of GBP73.3 million.
Yeo thinks BTR properties are taking market share from the traditional landlord “because it’s purpose-built”. He adds: “A single landlord will be able to take care of your needs … Community is very important post-Covid-19. The BTR landlord will even organise events for tenants. There’s a real stickiness to that.”
Beyond the niceties, tenants could also be forced to rent by the harsh UK housing market. “In the past, where interest rates were very low, but capital values were relatively high — you had no choice, you couldn’t make the downpayment, it didn’t matter how low interest rates were. Now, you have an environment where the mortgage rate is extremely high. So, you can make the downpayment [but] you cannot make your interest payments, so you still have to go back to the rental market.”
With six hotels and one adjoining retail property in Singapore, the domestic market represents 66.3% of CDLHT’s portfolio. For investors keen on riding the tourism recovery, Citi Research analyst Brandon Lee questions if investors should consider Singapore-focused S-REITs instead.
FEHT a purer proxy to Singapore
Lee sees FEHT as a better proxy given its 100% domestic exposure, with CDLHT’s earnings recovery to be impacted by rising debt cost and weaker foreign currencies. In a Jan 31 note, Lee rates CDLHT a “sell” stock with a target price of $1.15.
Lee notes that CDLHT, up 6%, has underperformed S-REITs year-to-date, which is up 7%, “with the majority of RevPAR recovery likely already priced in”. A strong Singapore dollar could also impede arrival growth from key regional countries such as Indonesia and Malaysia, adds Lee. “Should any of these risk factors materialise, the shares could deviate from our target price.”
FEHT, on the other hand, has a stronger balance sheet despite a relatively low portion of fixed debt (56% as at Dec 31, 2022). Its DPS in FY2022 ended December 2022 was 3.27 cents, and DPS in 2HFY2022 was 1.73 cents, which is 3.46 cents when annualised, representing a (pro forma) 5.8% growth over FY2022’s DPS.
Interestingly, FY2019’s DPS was 3.81 cents, and FY2018’s DPS was 4 cents, indicating that there could still be upside for FEHT’s DPS should occupancy and average daily rates (ADR) rise and visitor arrivals get closer to pre-pandemic levels.
According to Bloomberg, FEHT has six “buy” calls and no “sell” calls, while CLAS has nine “buy” calls and one “sell” call (from Morgan Stanley).
CLAS’s portfolio is somewhat different from most hospitality trusts’. It owns four asset classes: serviced residences, hotels, purpose-built student accommodation (PBSA) and rental housing. In 2HFY2022, stable income comprising master leases, management contracts with minimum guaranteed income, PBSA and rental housing contributed 52% to gross profit. Of these, master leases contributed 25.8% to gross profit, management contracts with minimum guaranteed income accounted for 12% of gross profit and long-stay properties (PBSA and rental housing) contributed 14.6%. Management contracts — which can capture the upside but are more volatile — contributed 48% to gross profit.
CLAS’s business model provides more stability during down-cycles but perhaps would capture less upside than hospitality trusts such as CDLHT and FEHT, which have a preponderance of hotels in the portfolio.