• Pushing back expectations of SG pickup
• Unattractive risk-reward as at 27 Jul
• FV drops from S$1.60 to S$1.42

2Q Results on Lower End of Expectations

CDL Hospitality Trusts’ (CDLHT) 2Q results were within expectations albeit on the lower end. 2Q18 revenue dipped 0.3% YoY to S$47.7m while NPI dropped 3.7% YoY to S$33.6m. The boost in NPI from UK’s The Lowry Hotel and Germany’s Pullman Hotel Munich was offset by the Brisbane divestments in Jan 2018, the closure of Dhevanafushi Maldives for renovations in Jun 2018, and a lower contribution from Grand Millennium Auckland.

On the latter, we expected moderated growth at CDLHT’s New Zealand asset given the stellar performance in 2017, but were unprepared for the 11.6% YoY decline in RevPAR during the quarter. Helped mainly by a higher capital distribution this quarter, 2Q18 DPU increased 2.9% to 2.14 S cents or 21.7% of our initial full-year forecast. For reference, 2Q17 DPU made up 22.6% of FY17’s total.

SG RevPAR Down 0.9% YoY in 2Q18

Recall that SG RevPAR grew 0.8% YoY in 1Q18 and that we expected it to accelerate into the year. SG RevPAR was disappointingly flat YoY with the management citing stiff competition and poorer corporate demand with the Trump-Kim summit and public holiday timings. In particular, CDLHT’s portfolio of corporate-focused hotels suffered occupancy drops to 60-70% for the few days during and around the Trump-Kim summit.

Still Waiting for the Good Times

We continue to believe CDLHT’s SG-heavy portfolio remains well-poised to ride the hospitality upcycle. However, following this quarter’s update, we expect to see much more muted DPU growth in the next half-year with a more robust pick-up in SG RevPAR arriving only in FY19.

In the meantime, given the rising interest rate environment, our cost of equity has increased from 7.5% to 8.0%. In addition, we reduce our nominal growth rate from 2.0% to 1.5%. After adjustments, our fair value drops 11% from S$1.60 to S$1.42.

We do not find current valuations attractive – CDLHT is trading at a 5.9% FY18F yield as of 27 Jul’s close, or more than 1 std deviation below its 5 year mean.

Against our fair value of S$1.42, the REIT would trade at 6.8% or close to its 5 year mean. While 10% down from its high in Jan, we see an unattractive riskreward for the REIT at this point in time. We downgrade CDLHT from Hold to SELL.

Source: OCBC Research - 30 Jul 2018