UOB Kay Hian has upgraded its recommendation on CDL Hospitality Trusts (CDLHT) to “buy” with a higher target price of $1.42 from $1.24 previously.
The higher target price is based on a dividend discount model (DDM), where the cost of equity makes up 6.5% and terminal growth makes up 1.8%, says analyst Jonathan Koh in a Jan 4 report.
“CDREIT trades at price-to-net asset value (P/NAV) of 0.93 times, which is 0.3 standard deviation (s.d.) below long-term mean,” he adds.
Koh is positive on the REIT as he sees it benefitting from the reopening, which is slated to resume in 2H2022.
While Singapore would have to tide through a new wave of Omicron infections in 1QFY2022, Koh expects that the government would reopen borders with expansion of capacity for existing vaccinated travel lanes (VTLs) and the introduction of new VTLs to resume in 2H2022.
“The anticipated recovery in the hospitality industry in Singapore has been delayed and postponed to 2H2022,” he adds.
In Singapore, the REIT has enjoyed contributions from W Hotel, one of its hotels under its Singapore portfolio. The hotel has been a popular destination for staycations due to its expansive view of the marina and seafront. In addition, “Sentosa Island provides Singaporeans with the closest semblance to an overseas holiday”, notes Koh.
“We estimate that W Hotel’s revenue per average room (RevPAR) has rebounded 28% q-o-q to $221 in 3QFY2021. We expect further upside with RevPAR increasing 27% q-o-q to $280 in 4QFY2021, driven by staycation demand,” he adds.
That said, the REIT’s other hotels in Singapore may face a “bumpy transition” on the path towards the country’s reopening.
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“CDREIT has five hotels under government contracts to serve as dedicated isolation facilities. Self-isolation and recovery at home has become the default arrangement, including those infected with the Omicron variant and their close contacts. Thus, the government might terminate the contracts for some of the dedicated isolation facilities,” says Koh.
“The affected hotels have to switch to serving transient corporate and leisure travellers and staycation demand. Nevertheless, there is downside protection as the five hotels are under master leases, which provide minimum fixed rents totalling $31.4 million per year (80% of revenue from the five hotels in 2020),” he adds.
In New Zealand, the REIT is also benefitting from stable contributions from Grand Millennium Auckland, which served as a managed isolation facility since 2QFY2020.
The contract from the government is expected to continue into 1QFY2022.
In addition, the hotel is the largest in Auckland, and is centrally located within the city’s CBD. As such, it contributed a “sizeable” 29.6% of CDLHT’s net property income (NPI) in 3QFY2021.
New Zealand’s government has also changed its approach – from zero-tolerance to living with Covid-19 as an endemic. The lockdown in Auckland ended on Dec 3, 2021; fully-vaccinated travellers from abroad would be able to visit the country from April 30, with a mandatory seven-day home isolation period.
In the UK, the REIT is anticipating a rapid recovery in 2022 after being hit by the wave of Omicron infections in mid-December 2021.
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Since Aug 2, 2021, the country has welcomed fully-vaccinated international travellers from the US and European Union (EU) member states without quarantine, although it was plagued by the rising number of cases from the Omicron variant later in the year.
“From Dec 7, 2021, the British government has imposed new measures requiring travellers to self-isolate until they receive negative results for PCR test on day two after arrival. Hotels were affected by cancellation of bookings. We expect confidence to be gradually restored after Europe weathers the new wave of Omicron variant infections in 1QFY2022. Recovery should resume in 2QFY2022, driven by domestic and intra-regional corporate and leisure travel,” writes Koh.
Germany should also see a gradual normalisation after a harsh winter, which saw another wave of Covid-19 infections, notes Koh.
That said, there has been a decline in new cases of Covid-19 infections in December 2021 which would benefit CDLHT’s Pullman Hotel Munich in terms of demand for meetings, incentives, conferencing & exhibitions (MICE) in 2022.
Expanded scope of investment strategy
The REIT’s expanded scope is also another plus to Koh. The REIT revised its principal investment strategy to include adjacent accommodation and lodging assets, such as rental housing, co-living, student accommodation and senior housing.
“Rental housing (also known as build-torent (BTR), multi-family or single family homes) includes residential apartment blocks and standalone houses targeting singles, couples and families. These adjacent assets provide stable rental income streams, which is less susceptible to economic cycles. They typically have a longer length of stay ranging from a few months to one to two years,” he writes.
As at 4.10pm, units in CDLHT are trading 1 cent lower or 0.83% down at $1.19, or an FY2021 P/B of 0.9 times and DPU yield of 2.2%.
Photo: CDLHT
