Fitch Assigns CDL Hospitality Real Estate Investment Trust 'BBB-'; Withdraws CDLHT Rating

CDL Hospitality Trusts

28/06/2019 08:03

(The following statement was released by the rating agency)


Fitch Ratings-Singapore-June 28: 

Fitch Ratings has assigned Singapore-based CDL Hospitality Real Estate 
Investment Trust (HREIT) a Long-Term Issuer Default Rating (IDR) of 'BBB-' with 
a Stable Outlook. At the same time, Fitch is withdrawing Singapore-based CDL 
Hospitality Trusts' (CDLHT) IDR of 'BBB-' with Stable Outloook as the stapled 
group does not have the ability to issue debt.

CDLHT is a stapled security constituted via a stapling deed, and combines HREIT, 
a real estate investment trust, and CDL Hospitality Business Trust (HBT), a 
business trust. Under the stapling deed, each stapled security consists of one 
HREIT unit and one HBT unit, and is treated as a single instrument. The rating 
on HREIT is based on the consolidated financial profile of HREIT and HBT given 
Fitch's view that there are strong operating and strategic linkages between 
HREIT and HBT. The IDR, however, applies specifically to HREIT.

HREIT's rating reflects the trust's robust financial profile, with FFO 
fixed-charge cover of 6.5x and loan-to-value (LTV) ratio, measured by net debt/ 
investment property plus fixed assets, of 33% at end-March 2019. The rating also 
reflects Fitch's expectations of an improvement in the operating performance of 
HREIT's geographically diverse properties in the next one to two years, mostly 
due to the full opening of Raffles Maldives Meradhoo following the completion of 
renovation works. Fitch believes HREIT's fundamentals are robust and it retains 
solid financing flexibility and cash flow stability from its lease-based income, 
where the majority of its hotels are under long-term master lease contracts. 
These factors underpin the Stable Outlook on the rating.

The ratings on CDLHT were withdrawn because the stapled group does not have the 
ability to issue debt.

Key Rating Drivers

Rating Based on Consolidated Profile: Fitch believes HBT is operationally 
integral to HREIT, as it acts as the master lessee of last resort of HREIT's 
acquisitions if required. In addition, provisions in the stapling deed require 
the HREIT manager, the HREIT trustee and the HBT trustee-manager to consider the 
interests of the unitholders of the stapled group as a whole, and not only the 
interests of the unitholders of HREIT and HBT separately. There may also be 
intra-trust lending between HREIT and HBT, if required, which may be used for 
meeting the commitments of each trust. The management team of HREIT's manager 
and HBT's trustee-manager are also the same, indicating equally strong 
management control over both trusts and strong operational linkages between the 
two.

Fitch believes HBT widens HREIT's access to markets and asset types. Under the 
Monetary Authority of Singapore's Code on Collective Investment Schemes, HREIT 
cannot derive more than 10% of its revenue from sources other than rental, 
interest or dividends, and therefore HBT provides the consolidated group with 
additional flexibility to operate assets and generate higher revenue from 
non-rental activities beyond this limit. HBT also contributes to the group's 
increased asset granularity and geographic diversification. As a result, Fitch 
believes that HBT is strategically important to HREIT's operations.

Maldives Renovation Drags Down Earnings: Fitch expects HREIT's revenue and 
EBITDA to decline by 2% and 3% yoy, respectively, in 2019 mainly due to lower 
occupancy while the Raffles MaldivesMeradhoo was closed for renovations. The 
resort had a soft-opening for its land villas on 9 May 2019 and the over-water 
villas are expected to be opened in 2H19. Raffles Maldives Meradhoo is managed 
by the Accor group. We believe these should lead to improvement in HREIT's funds 
flow from operations (FFO) adjusted net leverage to around 6.5x in the next two 
to three years, from 7.3x at end-March 2019, barring any debt-funded 
acquisitions.

Strong Financial Flexibility: We expect HREIT's FFO fixed-charge cover to remain 
above 5.0x over the medium term (2019F: 5.3x) as the trust refinances its debt 
while interest rates are rising. Fitch believes the trust will maintain its 
debt/assets ratio at no higher than 40%, in line with its track record and below 
the regulatory ceiling of 45%, which will keep its interest coverage and 
leverage appropriate for its rating. Nearly all of HREIT's assets are also 
unencumbered, which gives the trust significant flexibility to raise secured 
debt, if required. A rise in interest rates beyond our expectations will pose a 
risk to HREIT's financial profile, but this is mitigated by the trust's practice 
to fix the majority of its funding costs (1Q19: 60% of debt carried fixed 
rates).

Prudent Acquisitions; Sustained Portfolio Growth: HREIT has increased the scale 
of its asset portfolio mainly through acquisitions. We expect the trust to 
remain acquisitive and to focus on key developed markets in which it has an 
established track record, such as Singapore and Europe.We expect the trust to 
recycle assets with limited medium-term growth prospects and redeploy capital 
for acquisitions while maintaining a prudent capital structure.In 2018 it sold 
two hotels in Australiaand acquired a hotel in Italy. Although these sales led 
to lower fixed rent, we expect the trust to strike a balance between assets that 
generate fixed rent and those with variable rent that have the potential to 
benefit from growth when pursuing acquisitions in its target markets.

Singapore Hotel Demand: We expect revenue and net operating profit at HREIT's 
Singapore hotels to remain largely flat in 2019, as the Orchard Hotel undergoes 
renovations. Thereafter, we expect mild revenue growth as new supply eases. 
Industry research forecasts new hotel room growth in Singapore to increase by 
2.5% in 2019, while tourist arrivals will rise faster by 3.8%. The Singapore 
government has also limited 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 HREIT to continue to face 
challenges in several of its overseas markets. In the UK, there is rising 
competition and uncertainty related to Brexit, while alternative accommodation 
channels, such as peer-to-peer sharing, are increasingly popular in Japan. The 
trust's Angsana resort in the Maldives is relatively insulated from increased 
competition because all of its revenue is from fixed rent.

Derivation Summary

HREIT may be compared to Ascott Residence Trust (ART, BBB/Stable), US-based Host 
Hotels  Resorts, Inc. (BBB/Stable), Mapletree Industrial Trust (MIT; 
BBB+/Stable) and Lippo Malls Indonesia Retail Trust (LMIRT, BB(EXP)/Stable).

HREIT is rated one notch lower than ART and Host Hotels, which have stronger 
business profiles. ART has more than 70 properties and Host has more than 90, 
compared with the combined 19 properties held by HREIT and HBT. As a result, ART 
and Host have larger EBITDA scale as well. ART's properties are also more 
geographically diversified than those of HREIT, with no more than 15% of gross 
profits stemming from a single country, while around 60% of HREIT's net 
operating profit is from Singapore.

HREIT has stronger EBITDA margins than ART and Host, due to a larger share of 
master-lease income in the total 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. HREIT has 
stronger interest coverage and a lower LTV ratio than its peers, but its 
business profile is a constraint on its 'BBB-' rating.

MIT has a stronger business profile than HREIT as it has a larger property 
portfolio and EBITDA scale, and considerably longer cash flow visibility due to 
its longer lease contracts. Its diversified portfolio across industrial property 
types has allowed it to weather periods of soft rents amid a glut in industrial 
space, with limited impact on its operating cash flows. MIT also has a stronger 
financial profile than HREIT. For these reasons MIT is rated two notches higher 
than HREIT.

HREIT and LMIRT have similar profit margins and leverage profiles, but LMIRT has 
a smaller portfolio that is focused on Indonesia. HREIT also has stronger 
financing flexibility, which is evident from its significantly higher FFO 
fixed-charge cover ratio and covenant-light debt structure. Fitch also believes 
HREIT has stronger capital market access and lower foreign-exchange exposure. 
These differences explain why HREIT is rated higher than LMIRT.

Key Assumptions

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

-  Revenue to decline by 2% in 2019 and to recover by 4% in 2020

-  EBITDA margin to remain above 60% in the medium term (1Q19: 62%) 

-  Capital expenditure to be high at around SGD36 million in 2019 due to major 
renovation works, and to fall to10% of revenue over 2020-2022

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 HREITand HBT can substantially increase the 
scale and geographic diversity of theirproperty portfolio while maintaining the 
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%

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

Liquidity and Debt Structure

Manageable Refinancing Risks: The consolidated group had SGD109 million of 
readily available cash and SGD93 million of committed unused working capital 
facilities as of 31 March 2019. This is slightly less than the SGD210 million of 
debt maturing in the next 12 months and our forecast of around SGD39 million of 
negative free cash flow in 2019, primarily due to the renovations of the Raffles 
Maldives Meradhoo. However, HREIT has a large pool of unencumbered assets that 
comfortably covers the value of HREIT's peak annual debt maturity of SGD329 
million in 2021. At the same time, the trust has strong and proven capital 
market access, so Fitch expects the trust to be able to meet its refinancing 
requirements

CDL Hospitality Trusts; Long Term Issuer Default Rating; Withdrawn; WD

CDL Hospitality Real Estate Investment Trust; Long Term Issuer Default Rating; 
New Rating; BBB-; RO:Sta

Contacts: 

Primary Rating Analyst

Bernard Kie, 

Associate Director

+65 6796 7216

Fitch Ratings Singapore Pte Ltd.

One Raffles Quay #22-11, South Tower

Singapore 048583

Secondary Rating Analyst

Erlin Salim, 

Director

+65 6796 7259

Committee Chairperson

Vicky Melbourne, 

Senior Director

+61 2 8256 0325

 

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: 
leslie.tan@thefitchgroup.com; Peter Hoflich, Singapore, Tel: +65 6796 7229, 
Email: peter.hoflich@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

Parent and Subsidiary Rating Linkage (pub. 16 Jul 2018)

https://www.fitchratings.com/site/re/10036366

Sector Navigators (pub. 23 Mar 2018)

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

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