CDL Hospitality Trusts (SGX: J85) is a stapled trust that consists of a business trust and a real estate investment trust. It is the first hospitality-focused trust listed in Singapore’s stock market. Its portfolio consists of 15 hotels, two resorts, and one retail mall located across seven countries, and they include prominent hotels in Singapore such as Orchard Hotel, M Hotel, and Novotel Clark Quay, as well as overseas hotels such as Mercure Perth in Australia and Hotel MyStays Kamata in Japan. Since its listing in 2006, CDL Hospitality Trusts has grown the value of its portfolio of assets from…
CDL Hospitality Trusts (SGX: J85) is a stapled trust that consists of a business trust and a real estate investment trust. It is the first hospitality-focused trust listed in Singapore’s stock market.
Its portfolio consists of 15 hotels, two resorts, and one retail mall located across seven countries, and they include prominent hotels in Singapore such as Orchard Hotel, M Hotel, and Novotel Clark Quay, as well as overseas hotels such as Mercure Perth in Australia and Hotel MyStays Kamata in Japan.
Since its listing in 2006, CDL Hospitality Trusts has grown the value of its portfolio of assets from four hotels worth S$846 million to its current portfolio that is worth more than S$2.6 billion.
But despite its long-term track record of growth, its recent business performance has been somewhat disappointing. Its distribution per stapled security (DPS) has fallen from a high of 10.98 cents in 2014 to 9.22 cents in 2017. Consequently, the trust’s unit price has steadily retreated from its 2013 high of S$2.03 to the current price of S$1.71.
Despite the poor performance in the past few years, I believe there are some indications that there might finally be some light at the end of the tunnel for CDL Hospitality Trusts.
Visitor arrivals in Singapore are on the uptrend
More than 60% of the net property income of CDL Hospitality Trusts is derived from its Singapore portfolio. As such, the REIT is highly dependent on international visitors to the country. A big factor of the REIT’s poor performance between the years of 2013 and 2015 was the lack of growth in visitor arrivals. During that time, international visitor arrivals decreased from 15.6 million to 15.2 million.
But since then, visitor arrivals have returned to growth in 2016 and 2017, reaching 16.7 million in 2017. With the pace of growth of the Singapore economy expected to accelerate in 2018, visitor arrivals is once again expected to grow. Singapore is also hosting notable events this year that will likely drive the number of visits to here higher. These events include the 32nd ASEAN summit, ITB Asia, and OSEA 2018.
Hotel room supply growth tapering
According to the Singapore Tourism Board, an estimated 2,868 new hotel rooms entered the Singapore market in 2017. This increased the existing hotel supply by 4.5% over 2016, and also limited any positive effects on hospitality operators from the rise in visitor numbers in 2017.
However, the supply-growth of hotel rooms in Singapore is expected to taper off in the next few years as the chart below shows:
Source: CDL Hospitality Trusts 2017 fourth quarter earnings presentation
We can see that only a total of 2,825 new rooms are expected over the next three years, compared to 2,868 in 2017 alone. With its strong line-up of hotels in Singapore, CDL Hospitality Trusts will likely be well-placed to benefit from any positive mismatch in the supply-demand growth of hotel accommodations.
Debt headroom for yield accretive acquisitions
In 2017, CDL Hospitality Trusts undertook a rights issue to pay off part of its loans and to acquire two new properties in the UK and Germany. The trust also sold two of its assets in Australia, freeing up more capital to pay off loans.
Because of these, the trust was able to lower its gearing to 32.6% at end-2017 from 42% in the first quarter of 2017. The trust thus now has S$644 million of debt headroom to make acquisitions should it see fit. With the trust’s aggressive acquisition history, I do expect that it will make use of its new financial muscle to grow its portfolio in the future.
The Foolish conclusion
CDL Hospitality Trusts has had a rough few years as it had to face stiff competition in Singapore, on top of having to deal with stagnant visitor growth to our Garden City.
But recent developments suggest that its fortunes could change. The growth in visitor arrivals, the tapering of the hotel room supply growth, and the improved financial position of the trust, bodes well for its near-term future.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.