CDL Hospitality Trust (SGX: J85), or CDLHT, is one of Asia’s leading hospitality trusts with total assets valued at S$2.8 billion. Its portfolio comprises 16 hotels and two resorts with a total of 5,088 rooms, as well as a retail mall. These properties are spread out over countries such as Singapore, Australia, Japan, New Zealand, the United Kingdom, Germany, Italy and the Maldives.
For its Q2 2019 earnings report, CDLHT announced a downbeat set of earnings with revenue falling 0.5% year-on-year and distribution per unit (DPU) decreasing 3.3% year-on-year to 2.07 Singapore cents. However, I have strong reasons to believe that the REIT will be able to report higher DPU for unitholders moving forward, and three of the reasons are detailed below.
Reason 1: Room inventory impacted by AEI
For CDLHT’s Q2 2019, extensive asset enhancement initiatives (AEI) works were carried out at two of its properties – Orchard Hotel in Singapore and Dhevanafushi Maldives Luxury Hotel in the Maldives. The works at Orchard Hotel took out 8.6% of its room inventory, while the Maldives hotel was closed for upgrading works prior to its relaunch as Raffles Maldives Meradhoo.
A phased opening is expected in future quarters for Singapore’s Orchard Hotel once the AEI works are completed. As of June 2019, all 260 bedrooms have been refurbished and the remaining 65 Club Floor rooms are slated to complete in Q3 2019. For Raffles Maldives Meradhoo, the land villas were completed in May 2019 while the over-water villas will open later this year. As these two hotels progressively open up new areas for operations, income will also begin to flow and boost CDLHT’s overall performance.
Reason 2: Continued investment in tourism infrastructure in Singapore
Many new large-scale tourism projects are being planned across Singapore for the future. A few examples include the Greater Southern Waterfront Project and the Mandai Nature Precinct Project. The former involves the relocation of the Tanjong Pagar and Pasir Panjang port terminals to Tuas, thus freeing up valuable tracts of prime land (of around 1,000 hectares) for new tourism attractions and facilities being planned.
The latter involves the rejuvenation of Mandai area into an integrated nature and wildlife destination and will combine the Singapore Zoological Gardens, Bird Park, River Safari and Night Safari in one location. Other notable projects in future years include the planned upgrading of Resorts World Sentosa and Marina Bay Sands, and also the revamp of Orchard Road to include more activities and retail concepts.
All the above will transform Singapore into a more vibrant holiday destination for tourists and will boost the country’s standing as a must-see destination for international travellers.
Reason 3: Reasonable gearing ratio
CDLHT’s gearing ratio remains reasonable at 35.2% as of 30 June 2019, even after taking on debt to acquire the Hotel Cerretani Florence in Italy in November 2018. The REIT’s debt capacity is an additional S$524 million before it hits the regulatory debt ceiling of 45%, and the REIT’s weighted average cost of debt is also low at just 2.4%.
CDLHT has the ability to gear up further for even more acquisitions which could further boost DPU for unitholders.
Investors need to be patient
Investors in CDLHT need to exercise patience as the AEI works are only a temporary phase for the REIT before revenue and earnings recover. The longer-term initiatives for the tourism sector auger well for the REIT as it is in the right sector and will stand to benefit from the influx of more tourists. With a reasonable gearing ratio and great opportunities for accretive acquisitions due to a low cost of debt, I am confident that the REIT should be able to raise DPU in future quarters.
Want to better understand how to benefit from the investing landscape here in Singapore? Click here now for your FREE subscription to The Motley Fool’s investing newsletter. 'Take Stock' lets you know exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead here
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.