CDL Hospitality Trusts (CDLHT) is awaiting rate cuts, says Maybank Research analyst Krishna Guha, as high interest costs weighed on the REIT’s mid-single-digit topline growth in 1HFY2024 ended June 30.
CDLHT’s 1HFY2024 revenue per available room (RevPAR) grew through the year for nearly all of its eight markets. RevPAR in CDLHT’s one New Zealand property fell 1.2% y-o-y. CDLHT’s home market, Singapore, was also sequentially weaker due to high base effect and supply, notes Guha in an Aug 1 note.
While CDLHT’s financial metrics were stable q-o-q, Guha sees further room for growth from visitor arrivals catching up to pre-pandemic levels, but softer interest rates are key to share price performance.
Hence, Guha keeps his “buy” call but trims his target price to $1 from $1.10 previously, citing a weaker Singapore market, where the REIT owns six hotels and a retail mall asset, Claymore Connect.
Growth in most markets
CDLHT’s 1HFY2024 revenue and net property income (NPI) rose 6.8% and 5.9% y-o-y. With the exception of New Zealand, NPI was flat to higher for all other markets. Singapore saw NPI growth of 6.8% y-o-y.
See also: CDLHT 1HFY2024 DPS flat at 2.51 cents despite NPI growing 5.9% y-o-y
1HFY2024 RevPAR for Singapore rose 7.7% y-o-y led by 9.2 percentage point higher occupancy.
However, a high base effect showed through as 2QFY2024 RevPAR fell 1.1% q-o-q as a 6.6% fall in room rates and strong 1QFY2024 occupancy from a slew of concerts weighed sequentially.
Guha notes that an increase in hotel supply and the oil spill in Sentosa also hurt 2QFY2024 performance.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
Meanwhile, the UK saw 1HFY2024 RevPAR growth of 4.7% y-o-y. However, higher costs led to flat NPI. Maldives saw 7.4% and 4.6% growth in RevPAR and NPI as visitor arrivals grew 9.2%.
According to Guha, the focus is now on group business and managing last-minute cancellations in Singapore. Forward bookings for the Formula 1 race in Singapore are mixed compared to last year, he adds.
Managing funding costs
Gearing and funding costs were stable at 37.7% and 4.2% respectively., compared to 37.8% and 4.3% in 1QFY2024.
Coverage ratio inched down to 2.66x from 2.73x. Fixed rate hedge was 52%, down slightly from 51% in 1QFY2024.
With one of the lowest debt maturities of 1.8 years, potential rate cuts will be beneficial, says Guha.
CDLHT’s Manchester build-to-rent project, The Castings, was completed in June and is some 25% pre-let, with single-digit occupancy. It will contribute to NPI from FY2025. Yield on cost is 6% with a locked-in spread of 20 basis points. The cap rate of 4% for such assets indicate both valuation and rental uplift, says Guha.
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Keys to watch are supply and any information on rent caps, says Guha. “Management says it is acquisitive and will opportunistically divest. Focus is on total return rather than initial accretion.”
CDLHT posted 1HFY2024 distribution per unit (DPU) was flat y-o-y at 2.51 cents. Guha lowers his DPU forecast by 8.5% to factor in a lower contribution from Singapore, lower margins and weaker foreign exchange adjustments. His latest DPU forecast for FY2024, FY2025 and FY2026 is 5.4, 5.7 and 5.5 cents respectively.
In an Aug 5 note, RHB Bank Singapore analyst Vijay Natarajan downgraded CDLHT to "neutral" from "buy", with a lower target price of $1.03 from $1.20 previously.
Natarajan cites easing demand as a result of growing price resistance, a stronger Singapore dollar and the higher supply of hotel rooms, which he believes will likely persist in the latter half of the year.
CDLHT's 1HFY2024 results missed RHB's expectations, as well as that of consensus forecasts.
CDLHT's overseas markets also remains a "mixed bag", says Natarajan, with limited growth potential. "Financing cost pressures should also persist in the short term... While valuations are not expensive, we see no strong catalysts, with growth easing."
As at 11.45am, units in CDLHT are trading 0.5 cents lower, or 0.52% down, at 96 cents.
