CDL Hospitality Trusts‘ (SGX: J85) unit price has tumbled by around 19%, from S$1.66 on 20 January 2020 to S$1.35 at the time of writing.
Market sentiments surrounding this stapled group has certainly been affected ever since the COVID-19 outbreak.
However, does CDL Hospitality Trusts present an investment opportunity for long-term investors?
Let’s take a look using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
CDL Hospitality Trusts is a stapled group with an asset value of S$2.85 billion, as of 31 December 2019.
A “stapled group” means that if an investor buys units in CDL Hospitality Trusts, he/she would own both the CDL Hospitality Real Estate Investment Trust — a REIT — and CDL Hospitality Business Trust — a business trust.
CDL Hospitality Real Estate Investment Trust invests in a diversified portfolio of hospitality properties globally.
CDL Hospitality Business Trust exists primarily as a “master lessee of last resort” in the event CDL Hospitality REIT is unable to appoint a master lessee for any of the hotels in its portfolio at the expiry of the relevant master lease agreement or for a newly purchased hotel. The business trust also undertakes certain hospitality and hospitality-related development projects, acquisitions and investments which may not be suitable for the REIT.
As of end-2019, CDL Hospitality Trusts owns 16 hotels and two resorts consisting of 5,088 rooms in all, as well as a retail mall.
In Singapore, its portfolio comprises the following properties:
The sponsor of CDL Hospitality Trusts is Millennium & Copthorne Hotels Limited, a subsidiary of City Developments Limited (SGX: C09).
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
CDL Hospitality Trusts has a financial year that ends on 31 December each year.
The REIT just announced its 2019 earnings results on 30 January 2020.
The following table shows how CDL Hospitality Trusts has performed in terms of its revenue and NPI over the last five years:
|2015||2016||2017||2018||2019||Compound Annual Growth Rate (CAGR)|
|Net property income |
CDL Hospitality Trusts’ revenue and NPI were largely affected in 2018 and 2019 due to renovation works at Orchard Hotel, Raffles Maldives Meradhoo and Angsana Velavaru. There was also a decrease in contribution from some overseas markets (in part due to weaker currencies).
Otherwise, the revenue and NPI are trending upwards, albeit at a slow rate.
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
Now let’s look at CDL Hospitality Trusts’ historical growth of distribution per stapled security (DPS; similar to DPU for REITs).
|DPS (Singapore cents)||10.06||9.63||9.22||9.26||9.02||-2.7%|
Disappointingly, DPS has been coming down in the past five years.
3. Property Yield Check
Check for: Property yield of between 5% and 9%
For 2019, CDL Hospitality Trusts had an NPI of S$141.2 million while its valuation of investment properties stood at S$2.85 billion.
The figures translate to a property yield of 5%.
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 31 December 2019, CDL Hospitality Trusts had a gearing ratio of 35.4%, which is acceptable.
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
CDL Hospitality Trusts’ interest coverage ratio, as of end-2019, stood at 6.1x, above my threshold of 5x.
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
Here’s a look at CDL Hospitality Trusts’ latest occupancy figures for the largest contributor to its portfolio — the Singapore assets:
The occupancy rate at its Singapore hotels increased from 86.9% in 2018 to 87.5% in 2019, up 0.6 percentage point year-on-year.
Healthier visitor arrival numbers was one of the contributors to the higher occupancy.
Revenue per available unit (RevPAR), which is used to measure hotel performance, rose 1.6% to S$162.
The following shows CDL Hospitality Trusts’ Singapore portfolio’s RevPAR performance over the last five years:
The sharp decrease in 2016 can be attributed to the global economic slowdown, absence of events such as the SEA Games and SG50 celebrations, as well as the Zika-related travel advisory issued against Singapore.
The RevPAR further declined in 2017, but has made small improvements since then.
7. Rental Reversion Check
Check for: Positive rental reversions
Focusing on the biggest portion of the portfolio, Singapore, we see that the variable portion of the rental is based on the hotel’s revenue and gross operating profit. There is also a fixed rent component.
As such, the majority of the trust’s revenue is mainly dependent on the RevPAR of the properties. As seen under point 6, RevPAR showed a declining trend.
8. Growth Prospects Check
CDL Hospitality Trusts is likely to be affected by the COVID-19 outbreak since it has hit travel demand.
Furthermore, a large portion of its revenue is from its Singapore portfolio, which has taken a large hit due to the outbreak.
The Singapore Tourism Board projected a 25% to 30% drop in visitor arrivals this year, as the deadly coronavirus continues its global spread.
Singapore’s MICE (meetings, incentives, conferences and exhibitions) sector is also feeling the squeeze, with many events getting postponed or cancelled.
However, the Singapore portfolio should bounce back once the virus clears up.
Over the longer term, Singapore is pumping in lots of money to keep our country relevant to tourists.
Some of the investments are Jurong Lake District, Mandai Nature Precinct, Orchard Road revamp, Greater Southern Waterfront, and expansion of the two integrated resorts of Marina Bay Sands and Resorts World Sentosa.
Outside of Singapore, the trust’s portfolio faces stiff competition due to a competitive trading environment and an increased supply of new hotels.
New Zealand will be hosting more events and concerts, leading to more demand in rooms. The Maldivian government will be boosting tourism efforts by up to 50%. Tokyo will be building new theme parks. There is also a trend of tourism arrivals increasing in the other markets.
In the longer term, CDL will continue to pursue quality assets with potential to grow. There will also be ongoing enhancement of its assets.
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At CDL Hospitality Trusts’s current unit price of S$1.35, it has a price-to-book (PB) ratio of 0.89x, which is below the five-year average PB of 1x.
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At CDL Hospitality Trusts’ current unit price of S$1.35, its distribution yield stands at 6.7%, which is acceptable as well.
The Final Verdict
CDL Hospitality Trusts has a final score of 8/10.
Even though CDL Hospitality Trusts looks cheap, its DPS has been trending downwards. There is also a short-term risk to its business due to the COVID-19 outbreak.
Therefore, I’d place CDL Hospitality Trusts on my watchlist.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.