Overview of CDL Hospitality Trusts

CDL Hospitality Trusts (CDLHT) is a premier listed hospitality-focused real estate investment trust (REIT) in Singapore. With a diversified portfolio of 19 properties valued at SGD 2.9 billion, the trust spans across 4,821 rooms, a mall, and a build-to-rent project consisting of 352 units. Its sponsor, Millennium & Copthorne Hotels, operates over 130 hotels worldwide, while its parent, City Developments, stands as Singapore’s second-largest listed developer. CDLHT’s growth is driven by organic improvements in Singapore’s RevPAR (Revenue Per Available Room) and rising contributions from acquisitions in the UK and Europe.

Investment Thesis

CDLHT is currently navigating a soft patch in its performance metrics. The trust reported a 2H DPU of SGD 2.81 cents, reflecting an 11.9% YoY decline. This was attributed to the normalization of demand, higher operational and borrowing costs, and the stabilization of new assets in the UK. Despite these challenges, management remains optimistic, underlining potential growth from recent M&A deals, rate cuts, and visitor arrivals. The trust’s ability to maintain its financial stability amidst these headwinds reinforces its value proposition.

Performance Metrics

CDLHT’s 2H revenue and net property income (NPI) reached SGD 132.9 million and SGD 68.7 million, respectively, marking YoY declines of 3.9% and 9.0%. Singapore’s RevPAR dropped by 10.1% due to a 4% decline in occupancy and a 5.7% decrease in room rates, exacerbated by a demand-supply imbalance and the non-renewal of a group contract for W Hotel.

Overseas operations fared better, with most geographies (except New Zealand) registering YoY RevPAR growth. Japan emerged as a standout performer, achieving NPI growth due to operational improvements that offset currency depreciation. However, higher operating costs and unfavorable currency movements led to NPI declines in other regions.

Key Developments and Strategic Initiatives

CDLHT has launched a SGD 30 million refurbishment plan for W Hotel, signaling its commitment to improving asset quality. Management anticipates low single-digit RevPAR growth in Singapore, with performance peaks expected in 2Q and 4Q FY25 due to calendar effects and events. Overseas markets like Japan and Perth are projected to perform well, with robust demand and refurbished assets driving growth.

In the UK, the stabilization of assets such as Hotel Indigo Exeter, Benson Yard, and The Castings (with 90% occupancy) is expected to bolster bottom-line performance. Furthermore, anticipated rate cuts, particularly in Europe, are expected to lower borrowing costs, which currently stand at approximately 3.5%-4.0%.

Valuation and Recommendation

Maybank Research employs a 3-stage dividend discount model (DDM) to value CDLHT, applying a cost of equity (CoE) of 7.0%. The target price (TP) remains unchanged at SGD 1.10, representing a 35% upside from the current share price of SGD 0.86. Despite the slowing demand, CDLHT’s opportunistic acquisitions, potential rate cuts, and a 7% FY25E yield at 0.6x P/B make it an attractive buy recommendation.

Financial Projections

CDLHT’s revenue is projected to grow by 8.2% and 7.7% in FY25 and FY26, respectively, reaching SGD 303.3 million by FY26. Distributable income is expected to grow by 12.4% in FY25 and 7.9% in FY26, with DPUs projected at 5.91 cents and 6.24 cents, respectively. Borrowing costs are anticipated to decrease from 4.4% in FY24 to 3.6% by FY26, enhancing the trust’s financial efficiency.

Risks and Challenges

Potential risks include a slower-than-expected recovery in China’s outbound market, delayed rate cuts, and higher operational costs. Additionally, any significant volatility in foreign exchange rates or a sharp rise in interest rates could adversely impact earnings and valuations.

Environmental, Social, and Governance (ESG) Initiatives

CDLHT has revamped its ESG framework to align with sustainability goals. Notable initiatives include energy and water consumption reduction targets and certifications for its Singapore properties under the BCA Green Mark standards. The trust also emphasizes diversity and inclusion, with significant efforts in employee training and LGBTQ+ representation.

Conclusion

CDL Hospitality Trusts remains a promising investment opportunity despite current challenges. Its strategic acquisitions, refurbishment projects, and focus on sustainability position it well for future growth. With a BUY recommendation and a target price of SGD 1.10, CDLHT offers an attractive value proposition for investors seeking exposure to the hospitality REIT sector.