Fitch Affirms CDL Hospitality Trusts at 'BBB-'; Outlook Stable

CDL Hospitality Trusts

19/07/2016 08:35

(The following statement was released by the rating agency)

SINGAPORE, July 19 (Fitch) Fitch Ratings has affirmed CDL Hospitality Trusts' 
(CDL) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a 
Stable Outlook.

KEY RATING DRIVERS

Limited Rating Headroom: The affirmation of CDL's IDR is supported by its 
adequate financial profile, with FFO fixed-charge cover of 5.7x at end-2015, net 
debt / investment property assets at 35%, and FFO-adjusted net leverage of 6.5x. 
We expect CDL's financial profile to remain healthy over the next 12-18 months. 
However CDL's financial profile has weakened over the last 18 months due to 
challenging conditions in Singapore and the Maldives, which has reduced CDL's 
rating headroom. We expect CDL's financial profile to remain under pressure in 
2016 due to challenges across some of its markets, but expect it to remain in 
line with a 'BBB-' rating. 

Sizeable Fixed Rent: CDL's rating is also supported by the minimum fixed rental 
income structure for the majority of its portfolio, which provides some 
insulation to CDL's earnings during weak market conditions. In 2015, fixed rent 
amounted to more than 43% of CDL's total revenue. 

New Acquisition Supports Earnings: Income from CDL's UK hotel acquired last year 
may help boost earnings in 2016. Demand for this hotel is supported by the 
defensive fundamentals of the Cambridge market and is reflected in the strong 
performance of the hotel. Demand may be further enhanced if the British pound 
remains weak during the remainder of the year, as it has since the Brexit vote. 
The hotel's revenue per average room (RevPAR) rose by 21% in 4Q15 and by 7% in 
1Q16, partly supported by the refurbishment completed in April 2015. CDL has 
also instituted a foreign-currency hedging policy to partially hedge its income 
from overseas. 

Singapore Market Pressure Moderating: RevPAR of Singapore hotels fell by 1% in 
May 2016, compared with the 5% decline in 2015, as visitor arrivals have 
increased by 13% in the year to date (2015: 1%). Industry data estimates 2,800 
new hotel rooms will open in 2016. This is about 30% lower than previous 
estimates and follows construction delays that have pushed more supply into 
2017. Furthermore, the Singapore government has not released any new sites for 
hotel development since mid-2014, supporting a more balanced market. As a 
result, we expect the squeeze on Singapore hotels to moderate this year.

Australia, Maldives May Remain Weak: Income from CDL's hotels in Brisbane and 
Perth in Australia will likely continue to falter due to weak mining investment 
and growing room supply, but this will be mitigated by the high proportion of 
fixed rent in these contracts. CDL's Maldives hotels may continue to 
underperform due to the strength of the US dollar, slowing discretionary 
spending on leisure amid global economic uncertainty, and an increase in hotel 
supply that has pressured room rates and occupancy. RevPAR of the Maldives 
assets fell by 19% in 2015, and 28% in 1Q16. However two thirds of net property 
income from Maldives in 2015 stemmed from a master lease contract with minimum 
guaranteed income, which mitigates risk. 

Comfortable Liquidity: At end-March 2016 CDL had a SGD93m committed, unutilised 
multicurrency revolving credit facility at its disposal, and a further SGD174.2m 
of uncommitted unutilised credit facilities, compared with SGD209m of debt 
maturities falling due in August 2016. Fitch expects CDL to be able to 
comfortably refinance its upcoming maturities supported by its healthy financial 
profile. However, overall interest costs may increase as a result, in line with 
the market trend; we expect FFO interest coverage to reduce to 4.5x-5x by 
end-2016, which is still adequate for the current rating. At end-1Q16 CDL had 
fixed 60% of its interest-rate exposure using derivatives.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for issuer include

- Revenue growth of 3% in 2016 and 2% in 2017 

- EBITDA margin to reduce to around 65% (2015: 69%) partly due to the inclusion 
of a full year of operations of CDL's Cambridge hotel, which is on a management 
contract. Overall EBITDA to remain flat in 2016. 

- Dividend payout ratio to remain in line with the previous year's

- No new acquisitions have been factored in, with any M&A to be treated as event 
risk

RATING SENSITIVITIES

Negative: Developments that may, individually or collectively, lead to negative 
rating action include:

- Heightened interest-rate risk, which may be evident from FFO fixed-charge 
cover sustained below 4x

- FFO-adjusted net leverage sustained above 6.5x and net debt / investment 
property assets sustained above 40%-45%

- A more prolonged and sharp downturn in key hospitality markets than what we 
expect, resulting in a prolonged weakening in RevPAR combined with EBITDA 
margins weakening to below 60%.

Positive: No positive rating action is likely in the medium term due to the 
potential for weaknesses across most of its operating markets.

Contact: 

Primary Analyst

Hasira De Silva, CFA

Director

+65 6796 7240

Fitch Ratings Singapore Pte Ltd

6 Temasek Boulevard

#35-05 Suntec Tower Four

Singapore 038986

Secondary Analyst

Nandini VIjayaraghavan, CFA

Director

+65 6796 7216

Committee Chairperson

Vicky Melbourne

Senior Director

+621 8256 0325

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
leslie.tan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Methodology - Including Short-Term Ratings and Parent and 
Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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