• CDL Hospitality Trusts (SGX:J85)’s global hotel portfolio, like other industry players, has been hit hard by the COVID-19 pandemic. The impact on FY20 earnings is partly mitigated by fixed rent floor lease structures for some of its hotels.
• While its valuation has come down to a reasonable 0.6x P/B, the lack of visibility on when global travel can resume is likely to keep investors on the side-lines.

CDREIT Operational Updates

• CDL Hospitality Trusts’s Singapore hotels (65% of total assets) remain operational, with all onsite recreational facilities closed until 4 May under the Government’s new circuit breaker measures. The hotels have also been used as accommodation for returning travellers from abroad who have been issued 14-day stay-at-home notices, which has provided some occupancy support.
• With strict restrictions on travel, quarantines and complete lockdown of cities imposed across various markets in which CDL Hospitality Trusts operates, most of its overseas properties (UK, Germany, Italy, Australia, and New Zealand) are either closed on a temporary basis or operating at low occupancies. Management therefore expects an adverse impact on its earnings for 1H20, and an uncertain outlook beyond that.

Lease Structures With Fixed Rent Floor Offer Downside Protection

• The lease structure for its Singapore, New Zealand, Germany and Italy hotels have a fixed rent floor, which offers base rental protection in current market conditions. Australian hotels also largely comprise base rents. In total, the fixed rent floor accounts for SGD53m, or nearly half of our FY20 forecasts.
• Our current forecasts assume a 50-60% occupancy for its hotels in FY20 and a 10-15% drop in room rates, which we expect to gradually increase to 70-75% levels in 2021.

Recent Transaction Timeline Extended

• As part of the recently announced transaction, CDL Hospitality Trusts will be divesting Novotel Singapore Clarke Quay for redevelopment and acquire W Singapore Sentosa Cove from its sponsor. Both the transactions, which were meant to be completed by Apr 2020, are now expected to be completed in Jul 2020 under same terms.

Earnings and Assumption Changes

• We cut FY20-21F DPU by 48%, 25% and 15%, factoring in lower occupancy and room rates. Our COE assumptions are also raised by 150 bps to 9.2%, factoring in higher risks.
• Keep NEUTRAL, with new Target Price of SGD1.03 from SGD1.62, 7% upside and 5% FY20F yield.

Gearing Modest; No Refinancing Concerns

• As of 31 Mar 2020, CDL Hospitality Trusts has low gearing of 37.3% and cash reserves of SGD100m (excluding the above transactions which will lower gearing further). In terms of refinancing in 2020, there is JPY6.4bn (SGD83m), or 7.5% of its total, maturing in Sep 2020, for which negotiations are currently underway.
• With SGD1.5bn of unused financing facilities, we do not foresee any refinancing issues.

Source: RHB Invest Research - 20 Apr 2020