Among the REITs that have released their financial results so far, CDL Hospitality Trusts (CDLHT) stands out for its high proportion of floating rate debt.
As at Dec 31, 2024, CDLHT has 32.1% of its outstanding debt on fixed rates, while 67.9% are on floating rates.
Vincent Yeo, CEO of CDLHT's managers, says this was deliberate throughout 2024 “in anticipation of interest rate decreases, which have actually happened”.
Speaking to the media on Jan 27 at the release of CDLHT’s FY2024 results, Yeo says management increase its fixed rate borrowings at an “opportune time”.
With assets in eight countries, CDLHT has loans denominated in five currencies. From the largest loan quantum to the smallest, CDLHT’s loans are in Singapore dollars (44.5%), British pounds (26.6%), euros (20.4%), US dollars (4.4%) and Japanese yen (4.1%).
As at end-2024, all of CDLHT’s yen loans are on fixed rates, while all of its US dollar loans are on floating rates. Of the remainder, 86.6% of its Singapore dollar loans are on floating rates — the same for 59.8% of its British pound loans and 44.4% of its euro loans.
See also: Read the main cover story: Divining the direction of interest rates
Refinancing for loans maturing in 1H2025 is underway. This involves a multi-currency $68.3 million floating revolving credit facility (RCF) that expired in January, a $79.8 million Singapore dollar floating RCF expiring in March and a $62.6 million euro-denominated fixed term loan due in April. As at Dec 31, 2024, some 34.3% of CDLHT’s debt — or around $461 million — is due in 2025.
“We expect to achieve all the refinancing we need at potentially a better rate,” says Yeo. He told analysts in a separate briefing that CDLHT forecasts flat interest costs for FY2025, which are currently at 4.0%, but also anticipates potential savings.
According to the manager, CDLHT is poised to benefit from further rate cuts, “albeit at varying velocities”. In addition, management expects a faster pace of such cuts in Europe, which should bode well for that fifth of its debt — of which half are on floating rates.
See also: CDLHT sheds light on potential Liverpool PBSA on vacant plot bought for GBP1
Meanwhile in the UK, the Bank of England (BOE) cut interest rates to 4.5% from 4.75% at the start of February, and governor Andrew Bailey says rates remain on a downward path.
Analysts have highlighted CDLHT’s low fixed rate debt profile. DBS Group Research 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 (bp) q-o-q dip in borrowing costs [to 4.0%], after peaking in 3QFY2024.”
In a Feb 3 note, Wong and Tan say they are optimistic that CDLHT will be a “top beneficiary” of lower interest rates once cuts materialise in 2025.
While the DBS analysts think CDLHT’s gearing remains at a “comfortable” 40.7% as at Dec 31, 2024, RHB Bank Singapore analyst Vijay Natarajan thinks gearing is “on the high side” and sees “limited room” for further fully debt-funded acquisitions.
The RHB analyst has a different perspective: While CDLHT’s high proportion of floating rate debt could help the REIT reprice its loans downward, rate cuts are not guaranteed. The REIT remains exposed to interest rate volatility with only 32% of its debt being fixed, says Natarajan.
Citing challenges to CDLHT’s Singapore hotel portfolio, such as the absence of large-scale events and “softening” visitor spending, Natarajan remains “neutral” on CDLHT while trimming his target price to 93 cents from $1.
His Jan 31 report represents yet another cut to his target price for the REIT, which has only fallen since September 2023, when the estimate was at $1.25.
See also: Analysts’ target prices for Elite UK REIT promise 13%-42% upside
Likewise, DBS’s Wong and Tan are staying “buy” on CDLHT but with a lower target price of $1.10 from $1.20 previously.
Mitigating volatility
On the other end of the scale is Elite UK REIT, whose assets are all located in the UK.
As at Dec 31, 2024, fixed rate loans comprise 86% of Elite UK REIT’s outstanding debt, up from 63% at end-2023.
The REIT manager says its high proportion of fixed rate loans is a way to mitigate volatility from interest rate risk.
RHB’s Natarajan says these were hedged at “competitive rates”, which is expected to result in annual savings of GBP2 million ($3.38 million).
Cost of borrowing fell 30bps y-o-y to 4.9% at end-2024. For context, the REIT was working to bring down its leverage ratio, which was a greater priority during the year.
Following its successful GBP28 million preferential offering in January 2024, Elite UK REIT reduced its leverage ratio from 50.0% at end-2023 to 43.4% at end-2024.
Similarly, its net gearing ratio declined from 47.5% at end-2023 to 42.5% at end-2024.
Elite UK REIT’s total debt as at end-2024 is GBP190.5 million, down from GBP221.3 million a year earlier.
Elite UK REIT has no debt maturing in 2025 and 2026 and refinancing is only due in 2027.
Phillip Securities Research analyst Liu Miaomiao expects “minimal immediate impact” from the BOE’s recent rate cut, with Elite UK REIT’s cost of borrowing forecast to remain at 4.9% in FY2025.
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