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Can the Dividend Growth at CDL Hospitality Continue? Part 2

Welcome to the second part of the article on CDL Hospitality Trusts  (SGX: J85). In my previous article, I covered the revenue breakdown for the stapled trust. In here, let’s take a look at the net property income and debt profile of the trust.

As a recap: CDL Hospitality Trusts is primarily in the business of owning and running hotels and currently has 14 properties under its portfolio. The properties are located in Singapore, Australia, New Zealand and the beautiful Maldives. At the local front, the trust owns recognizable hotels such as Orchard Hotel, Grand Copthorne Waterfront Hotel, Novotel Singapore Clarke Quay, and M hotel.

The stapled trust has recorded capital gains of about 132% from 1 January 2009 to its closing price last Friday (note: 9 January 2015). By comparison, the capital gains of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), was just 79.3% for the same duration.

Over the past six plus years between 2009 and 2014, CDL Hospitality Trusts has also paid out steady distrbutions totaling more than 57 cents per share.

Financial year Distribution per stapled security
2009 8.57
2010 10.20
2011 11.05
2012 11.32
2013 10.97
First half of 2014 5.25

Source: CDL Hospitality Trust’s earnings report

So, while the returns from CDL Hospitality Trusts has been fashionable, as Foolish investors, we should look behind the curtains to understand how sustainable these distributions are, and how they might grow.

A closer look

Ideally, we would like to see the trust’s revenue dollars drip down to the bottom-line. For that, we look into the Net Property Income (NPI) of the properties. The NPI is defined as the gross rental revenue of a property minus all related expenses.

image (3)

Source: Company Earnings Report

Over the five financial years above (from 2009 to 2013), the NPI for CDL Hospitality Trusts grew by about 61%. The pace of growth is faster than its revenue growth, so that’s a positive sign. It should be no surprise that the hotels in Singapore were the primary contributor to CDL Hospitality Trusts’ NPI with a 70% share. It is also the largest contributor to the trust’s NPI growth during this timeframe. The acquisition of hotels in Australia and the Maldives also helped to grow NPI for the trust.

Finally, Foolish investors might also want to look at the debt profile of CDL Hospitality Trusts. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the trust’s latest quarterly earnings presentation for the quarter ended 30 September 2014.

Debt Outstanding $699 billion
% Fixed Debt 46%
Debt to Assets Ratio 30.20%
Interest Coverage Ratio 8.6 times
Weighted Average Debt to Maturity 2.4 years

Source: CDL Hospitality Trusts’ earnings presentation

We have to keep an eye out for debt refinancing in 2015 when about 36% of CDL Hospitality Trusts’ debt becomes due. At the moment, only 46% of the trust’s borrowings are on fixed interest rates. Therefore, there is some risk that CDL Hospitality Trusts will experience some pressure on its bottom-line from any rise in interest rates. That said, CDL Hospitality Trusts still has $51 million in a revolving credit facility which is unutilized.

Foolish summary

CDL Hospitality Trusts has managed to grow its distributions over the past five financial years. During this time, the trust had also managed to expand both its gross revenue and NPI through acquisitions and higher tourist arrivals in Singapore.

In particular, the trust singled out the opening of the two integrated resorts – Resorts World Sentosa and Marina Bay Sands – as major drivers of tourist growth in Singapore since 2010. Looking forward, CDL Hospitality Trusts expects  factors such as a growing Meetings, Incentive Travel, Conventions and Exhibitions (MICE) industry and the new Singapore sports hub to further drive growth in tourist arrivals.

On 1 December 2014, CDL Hospitality Trusts announced the acquisition of two hotels in Japan for $63.8 million. Furthermore, the trust is also undergoing an asset enhancement initiative (AEI) for Claymore Link. We have to continue to observe if the AEI is able to bring about growth in revenue and NPI.

So while there may be potential for more growth for CDL Hospitality Trusts, the flipside is that the hotels in the trust’s portfolio can be sensitive towards tourist arrivals and supply of hotel rooms, therefore these could also be metrics to observe. Citing data from the Singapore tourism board, CDL Hospitality Trusts’ Manager noted that there was a 3.3% year-on-year decline in tourist arrivals to Singapore for the first eight months of 2014. The main cause was lower Chinese tourist arrivals. Additionally, there will be an estimated 3,229 rooms to be added in 2015 which will add competitive pricing pressure for hotel rooms here.

As of 9 January 2015’s closing price of $1.76, CDL Hospitality traded at a price-to-book ratio of around 1.1, and has a dividend yield of around 6.1%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.