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

CDL Hospitality Trusts

29/06/2018 06:52

(The following statement was released by the rating agency)


Fitch Ratings-Singapore-June 29: Fitch Ratings has affirmed Singapore-based CDL 
Hospitality Trusts' (CDLHT) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The 
Outlook is Stable.

The affirmation reflects CDLHT's robust financing flexibility and the 
satisfactory operating performance of its geographically diverse portfolio of 
hotels and resorts. The trust's performance is underpinned by selective 
acquisitions that have increased operating scale, as well as a majority of 
rental income from master leases with global hotel operators. CDLHT also has a 
significant portion of fixed rent, which insulates the trust's cash flows to an 
extent from sharp economic downturns. 

KEY RATING DRIVERS

Sustained Portfolio Growth: CDLHT has increased the scale of its asset portfolio 
mainly through acquisitions, as reflected in the sustained EBITDA growth to 
SGD134 million in the latest 12 months to end-March 2018, from SGD119 million in 
2015. We expect CDLHT to remain acquisitive and to focus on key developed 
markets in which it has already established a track record, such as in the UK 
and in Germany. The trust's robust financial flexibility, helped by its 
equity-funded acquisitions in 2017, as well as the divestiture of two of its 
hotels in 1Q18, will support inorganic growth.

Prudent Acquisitions Expected: CDLHT sold two of its Australian properties for 
approximately SGD80 million in January 2018 at a premium over the purchase price 
to recycle assets in areas where it believes mid-term growth prospects are 
limited. We expect the trust to redeploy the capital into selective 
acquisitions, while maintaining a prudent capital structure. The hotel 
divestments, however, have led to lower fixed rent for CDLHT, which is a 
marginal increase in credit risk. Over the longer term, we expect the trust to 
strike a balance between assets that generate a majority of fixed rent and those 
that have the potential to benefit from variable-rent growth when pursuing 
acquisitions in its target markets.

Singapore Hotels Recovering: We expect revenue and net property income (NPI) at 
CDLHT's Singapore hotels to rise 4% in 2018, as new hotel room supply eases, and 
1% annually thereafter. Industry research shows that new hotel room growth in 
Singapore will slow to 2.5% in 2018, and to around 1% in 2019, from around 5% in 
2017. The outlook is supported by the government's strategy of limiting the 
availability of land parcels for hotel development over the past few years. 
However, weaker regional economic growth from trade-related tensions may dampen 
the potential benefits of tighter supply, and remains a key risk, particularly 
as China is a large inbound market.

Challenging Conditions in Some Markets: We expect CDLHT to continue to face 
challenges in several of its overseas markets, particularly in Cambridge in the 
UK, Japan and the Maldives, stemming from rising competition from new hotel 
rooms and in the case of Japan, from alternative channels such as peer-to-peer 
sharing. The trust is rebranding one of its properties in the Maldives into a 
Raffles Hotel in 2018 (part of the Accor group), which is likely to disrupt 
operations in 2H18, but we expect revenue and NPI to rebound modestly in 2019 
with the help of the Accor group's extensive global marketing footprint. The 
trust's second property in the Maldives is insulated from increased competition 
to an extent due to its current high revenue contribution from fixed rent. 

Strong Financial Flexibility: We expect CDLHT's funds flow from operations (FFO) 
fixed-charge cover to remain above 5.0x over the mid-term (2017: 8.7x; 2018 
forecast: 6.4x) as the trust refinances its debt in a rising interest rate 
environment. Fixed-charge coverage was unusually high in 2017 also because of a 
timing difference as the trust paid out less interest during that period, which 
we expect will normalise over the next two years. We think FFO adjusted net 
leverage will remain less than 6.0x (2017: 6.0x), barring any debt-funded 
acquisitions. However, we believe the trust will maintain its loan-to-value 
ratio (LTV) at no higher than 40%, in line with its track record, and below the 
regulatory ceiling of 45%, keeping its fixed-charge coverage and leverage 
appropriate for its rating. 

Nearly all of CDLHT's assets are also unencumbered, which affords the trust 
significant flexibility to access secured-debt markets, if required. Interest 
rates rising beyond our expectations pose some risks to CDLHT's financial 
profile, mitigated by the trust's policy to fix a majority of its funding costs 
(end-April 2018: 66% fixed). 

DERIVATION SUMMARY

CDLHT's rating is one notch lower than that of Ascott Residence Trust (ART, 
BBB/Stable) and US-based Host Hotels & Resorts, Inc. (BBB/Stable). Both ART and 
Host have a stronger business profile than CDLHT, characterised by a 
significantly larger portfolio of assets (ART has over 70 properties and Host 
has more than 90), which is reflected in their larger EBITDA scale. ART's 
properties are also more geographically diversified than CDLHT's portfolio, with 
no more than 15% of gross profits stemming from a single country in 2017, 
compared with 57% of CDLHT's NPI coming from Singapore, although Host's 
portfolio is more concentrated in the US. 

CDLHT has stronger EBITDA margins than ART and Host, due to a larger mix of 
master-lease income and higher fixed rent from its assets, but the two peers' 
larger and more granular property portfolios offset the associated risks. ART 
and Host have also demonstrated best-in-class access to diverse sources of 
capital, which enhances the trusts' financing flexibility. On the other hand, 
CDLHT has stronger interest coverage and lower LTV than its peers, but its 
business profile acts as a constraint to its 'BBB-' rating.

No parent-subsidiary rating linkage considerations or operating environment 
constraints are applicable to CDLHT's ratings.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Revenue to increase by 3% in 2018 and 5% in 2019

- EBITDA margin to remain above 65% in the next two years

- Capital expenditure to remain at 8.5% of revenue over next two years

- Dividend of 10 Singapore cents per share to be paid out in the next two years 

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

No positive rating action is anticipated over the next 24 months. Positive 
rating action could be considered if CDLHT can substantially increase the scale 
and geographic diversity of its property portfolio while maintaining its current 
financial profile.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- 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 sustained decline in EBITDA, combined with a weakening in EBITDA margins to 
below 60% 

LIQUIDITY

Manageable Refinancing: CDLHT, like most REITs, is exposed to refinancing risk 
given its requirement to pay out at least 90% of its profits as dividends, in 
order to benefit from tax-transparency treatment. However, we expect CDLHT to 
continue meeting its refinancing requirements comfortably as demonstrated in the 
past, supported by its strong financial flexibility and satisfactory operating 
performance. At end-April 2018, CDLHT refinanced SGD68 million due in May 2018, 
and had an additional SGD120 million of debt due in June, which has been 
refinanced. Another SGD100 million is due in December 2018.   

Contact: 

Primary Analyst

Hasira De Silva, CFA

Director

+ 65 6796 7240

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay

South Tower #22-11

Singapore 048583

Secondary Analyst

Bernard Kie

Associate Director

+65 6796 7216

Committee Chairperson

Jeong Min Pak

Senior Director

+82 2 3278 8360

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 Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

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https://www.fitchratings.com/site/dodd-frank-disclosure/10036173

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https://www.fitchratings.com/site/pr/10036173#solicitation

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https://www.fitchratings.com/regulatory

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