RHB Bank Singapore analyst Vijay Natarajan trimmed his target price on CDL Hospitality Trusts (CDLHT) yet again last week after the release of the REIT’s results for FY2024 ended Dec 31, 2024. Now, DBS Group Research is doing the same, staying “buy” on the REIT but with a lower target price of $1.10 from $1.20 previously.
Still, DBS remains upbeat on its “attractive valuations for a Singapore-focused hotel play”. In a Feb 3 note, DBS analysts Geraldine Wong and Derek Tan say CDLHT “continues to be one of the top proxies” within the S-REIT space for a turn in interest rates. “Notably, CDLHT saw a 40 basis point q-o-q dip in borrowing costs, after peaking in 3QFY2024.”
With 34% of its loan book to be refinanced in FY2025, and a “low” fixed-hedge profile of 32%, Wong and Tan are optimistic that CDLHT will be a “top beneficiary” of lower interest rates once cuts materialise in 2025.
CDLHT’s gearing remains at a “comfortable” 40.7% as at Dec 31, 2024, say Wong and Tan. Average cost of debt decreased by 40bps q-o-q to 4.0%, leading to a “stable” interest coverage ratio (ICR) ratio of 2.30%. “CDLHT forecasts flat interest costs for FY2025 (currently at 3.0%) but anticipates potential savings, as 34% of its loan book is due for refinancing in 2025 and it has a low fixed-hedge profile of 32%,” write the analysts.
FY2024 results
CDLHT reported 2HFY2024 gross revenue of $132.9 million, 4% lower y-o-y, with the further normalisation of travel in key markets and ongoing asset enhancement initiatives (AEI) at two properties.
See also: RHB trims CDLHT target price yet again after FY2024 results miss estimates
Net property income (NPI) declined 9.0% y-o-y to $68.7 million due to higher operating expenses in the UK and higher interest expenses overall.
Distributable income declined 11% y-o-y to $35.4 million, mainly due to negative NPI contribution from new build-to-rent property The Castings and higher interest costs.
2HFY2024 DPU declined 12% y-o-y to 2.81 cents, which translates to a full-year DPU of 5.32 cents. This is in line with DBS’s estimates.
See also: CDLHT’s FY2024 DPS down by 6.7% y-o-y to 5.32 cents due to Manchester BTR project and interest costs
Singapore hotel supply overhang
CDLHT’s Singapore operational performance in 2HFY2024 extended its revenue per available room (RevPAR) weakness in 3QFY2024, with a 10% y-o-y decline in both quarters. This is in line with DBS’s 2025 thesis for a year of moderation for hotels.
“Given the current oversupply of hotel rooms in Singapore, our outlook for growth in Singapore hotels for FY2025 is neutral to cautious,” say Wong and Tan.
The DBS analysts’ RevPAR projections for CDLHT’s Singapore hotel properties are now “flat for the next one to two years”, reflecting reduced room inventory at W Hotel as the property enters its next phase of asset enhancement work to refurbish rooms.
The AEI work is expected to cost $30 million and is planned for completion by 3QFY2025, in time for the peak travel season in Singapore, says DBS.
Marginally negative hotel income from Singapore is offset by flat borrowing cost y-o-y and incremental contribution from UK assets Benson Yard, The Castings and Hotel Indigo Exeter.
CDLHT posted a 4 percentage point y-o-y decline in occupancy to 79% and a 5.5% decline in average daily rate (ADR) to $246.
See also: CDLHT sheds light on potential Liverpool PBSA on vacant plot bought for GBP1
RevPAR performance in 2HFY2024 was led by Japan, which continues to captivate tourists, rising 17% y-o-y. Other key markets in Europe and the Maldives saw growth within the low- to mid-single digit range y-o-y, while New Zealand saw a 11% y-o-y decline in RevPAR due to ongoing refurbishment work at Grand Millennium Auckland that resulted in a 20% decline in room inventory for the most part of 2HFY2024.
DBS has a “flat” DPU outlook for CDLHT, with an upside opportunity to ride the softening interest rate outlook in FY2025. However, Wong and Tan have not priced the softening rate outlook into their estimates.
CDLHT’s living assets
The pivot towards the build-to-rent sector, among other possible lodging asset classes, highlights management’s strategic intent to build resilience through diversity and earnings stability, say the DBS analysts.
With two recent acquisitions within the UK — Indigo Hotel Exeter and the purpose-built student accommodation Benson Yard — CDLHT’s UK income exposure is expected to go north of 20%, says DBS.
“CDLHT managers remain opportunistic in pursuing accretive overseas acquisitions, with the UK remaining a favoured market,” they add.
Maiden contributions from Hotel Indigo Exeter and Benson Yard, along with stabilisation of The Castings at 85% occupancy for the full year of 2025, should support income going forward, say Wong and Tan.
