Fitch Revises Outlook on CDL Hospitality REIT to Negative; Affirms at 'BBB-'

CDL Hospitality Trusts

13/04/2020 13:56

(The following statement was released by the rating agency)


Fitch Ratings-Singapore-April 13: 

Fitch Ratings has revised the Outlook of Singapore-based CDL Hospitality Real 
Estate Investment Trust (HREIT) to Negative from Stable. At the same time, the 
agency has affirmed the Long-Term Issuer Default Rating (IDR) at 'BBB-'.

The revision of the Outlook to Negative reflects our expectation that operating 
EBITDA will be affected by the economic disruptions related to the COVID-19 
outbreak, which has severely curtailed travel, hospitality and leisure 
activities globally. In addition, the continued uncertainty about the recovery 
of the global hospitality industry means there is a risk that HREIT will not be 
able to return to within Fitch's rating sensitivities by end-2021.

The rating affirmation is based on the sufficient headroom in HREIT's credit 
metrics for a temporary deterioration. However, a material and persistent 
worsening in the metrics to levels more in line with a lower IDR would warrant a 
rating downgrade. The affirmation also captures liquidity that is sufficient for 
HREIT to manage through a period of heightened business volatility and the 
company's prudent financial management, which was evident in its robust 
financial profile before the COVID-19 outbreak. Fitch's forecasts assume a harsh 
- but temporary - decline in global economic activity as containment measures 
are taken to halt the spread of the virus, and governments undertake concerted 
fiscal and monetary measures. Under this assumption, we expects a sharp decline 
in occupancy rates across HREIT's properties in 2020, which will result in 
revenue declining by nearly 50% and net property income margin narrowing to 
around 55% (from around 75% historically). Fitch expects demand to only 
gradually recover from 4Q20, and to return to the pre-outbreak level by 2H21. 

Key Rating Drivers

COVID-19 Outbreak Hurts Hotel Occupancy: We expect worldwide hotel occupancy to 
fall sharply in 2020, particularly in 2Q20 and 3Q20, before gradually improving 
from 4Q20 and returning to normal by 2H21. Governments globally have announced 
stimulus packages to soften the economic shock, including property tax rebates 
by the Singapore government. We believe the sharp decline in demand will lead to 
lower revenue for HREIT, and as some operating costs are fixed, we expect EBITDA 
to decline by nearly 75%. As a result, HREIT is likely to breach of most of its 
negative rating sensitivities in 2020.

We believe the pace of recovery in 2021 is highly dependent upon governments' 
efforts to control the outbreak globally while facilitating international 
travel. In the event of a strong rebound in the hospitality industry in 2H20, 
HREIT would be well-positioned to restore its operating performance in a 
relatively short time, paving the way for an Outlook revision to Stable in 2021. 
However, a larger-than-expected decline in operating earnings in 2020 could 
drive a rating downgrade, especially if both business and consumer confidence 
globally fail to return to the pre-outbreak levels for an extended period. 

Recovery by 2021: We believe HREIT's master lease agreements and its lower 
exposure to the operating costs of its properties, relative to that of a pure 
lodging/hotel operator, enable the REIT to generate positive cash flow and 
profit. The majority of HREIT's properties have long-term master lease contracts 
with global hotel operators, which mostly consist of a base rent plus variable 
rent structure, which provides more stability in HREIT's cash flows compared 
with those of pure lodging and hotel operating companies. 

The trust also has more limited responsibility for the operating costs of its 
hotels, which it leases to global operators, which is reflected in its higher 
EBITDA margin than a typical hotel operator. Nevertheless, we still expect 
HREIT's EBITDA margin to fall to around 30%, below the 60% level at which we 
would consider negative rating action, in 2020 due to some fixed components in 
its cost structure. We expect margin to recover to close to 60% by the end of 
2021.

Sufficient Liquidity; Manageable Refinancing:HREIT, 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 HREIT to continue meeting its refinancing requirements comfortably as 
demonstrated in the past, supported by its strong financial flexibility. The 
consolidated group had SGD135 million of readily available cash and SGD58 
million of committed unused working capital facilities at end-2019. This is 
sufficient to cover the SGD79 million of debt maturing in the next 12 months and 
our forecast of around SGD16 million of negative free cash flow in 2020. 

At the same time, HREIT also has strong and proven capital market access, a 
large pool of unencumbered assets and will have at its disposal the proceeds 
from its Novotel Singapore Clarke Quay asset disposal and its SGD500 million 
uncommitted facility, which are adequate to fund the acquisition of W Hotel. At 
end-2019, CDLHT's unencumbered asset cover (measured by unencumbered assets/ 
unsecured debt) ratio was around 2.7x.

Prudent Acquisitions; Sustained Portfolio Growth: HREIT has expanded its asset 
portfolio mainly via acquisitions. We expect the trust to remain acquisitive and 
to focus on key developed markets in which it is established, such as Singapore 
and Europe. We expect HREIT to recycle assets with limited medium-term growth 
prospects and redeploy capital for acquisitions while maintaining a prudent 
capital structure.

Derivation Summary

HREIT is rated one notch lower than Singapore-based Ascott Real Estate 
Investment Trust (ART, BBB/Stable). ART has more than 70 properties compared 
with the combined 19 properties held by HREIT. We believe this, combined with 
ART's larger proportion of master leases in its portfolio, leads to a stronger 
business profile relative to HREIT. 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, further warranting the one-notch rating 
difference.

Compared to Starhill Global Real Estate Investment Trust (BBB/Stable), HREIT has 
a weaker business profile primarily because the majority of Starhill's 
properties are spread across some of the most sought after retail precincts in 
its respective geographies. Starhill's cash flows are inherently more stable 
across economic cycles than HREIT's due to a higher portion of income stemming 
from long-term leases paying fixed rent with built-in upward-only or consumer 
price index-driven periodic rent adjustments. While HREIT's strong financial 
profile mitigates some of these risks, its rating is constrained at 'BBB-' by 
its weaker business profile compared to Starhill.

Mapletree Industrial Trust (MIT; BBB+/Stable) 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 is rated at the same level as US-based Host Hotels  Resorts, Inc. 
(BBB-/Stable), which owns some of the largest and most valuable hotels in the 
US. Fitch recently downgraded Host's IDR due to the lasting impact of the 
coronavirus pandemic and the cyclicality of its cash flows. Host is subject to 
overnight repricing of its room rates, and is exposed to a greater degree of 
fixed costs. In comparison, HREIT's long-term master leases provide minimum 
guaranteed rents that support EBITDA margin and relatively insulate the trust's 
cash flows compared with those of Host. Both trusts maintain large pools of 
unencumbered assets that serve as contingent liquidity sources and have 
demonstrated strong access to credit markets throughout the business cycle.

HREIT and Lippo Malls Indonesia Retail Trust (LMIRT, BB/Negative) 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 interest coverage 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 around 50% yoy in 2020 as average occupancy falls to 
around 40%. Occupancy to recover to around 65% in 2021

- EBITDA margin to fall to around 30% in 2020 before improving to around 55% by 
2021

- Capital expenditure to be around SGD13 million in 2020

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating 
Action/Upgrade:

- Faster-than-expected rebound in the hospitality market from the coronavirus 
pandemic, enabling improvement of HREIT's occupancy rates and average daily 
rates back to the pre-outbreak levels by 2021

- FFO net leverage below 6.5x (end-2019: 8.2x) and loan-to-value ratio below 40% 
by 2021

- Improvement in EBITDA margin to around 60% or above by 2021

- FFO fixed charge coverage ratio above 4x by 2021 (end-2019: 5.1x)

Factors That Could, Individually or Collectively, Lead to Negative Rating 
Action/Downgrade:

Negative rating action may be warranted if there is a deeper economic disruption 
following the COVID-19 crisis than currently modelled by Fitch, leading to a 
significant delay in normalisation of operations, which would cause HREIT's 
financial ratios to remain outside the above guidelines for a prolonged period.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: We expect HREIT to continue to meet its refinancing 
requirements comfortably as demonstrated in the past, supported by its strong 
financial flexibility. The consolidated group had SGD135 million of readily 
available cash and SGD58 million of committed unused working capital facilities 
at end-2019. This is sufficient to cover the SGD79 million of debt maturing in 
the next 12 months and our forecast of around SGD16 million of negative free 
cash flow in 2020. 

At the same time, HREIT also has strong and proven capital market access, a 
large pool of unencumbered assets and will have at its disposal proceeds from 
its Novotel Clarke Quay asset disposal and its SGD500 million uncommitted 
facility, which are adequate to fund the acquisition of W Hotel.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

ESG Considerations

ESG issues are credit neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

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

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. 27 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10111917

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including 
rating assumption sensitivity)

https://www.fitchratings.com/site/re/10090792

Sector Navigators-Addendum to the Corporate Rating Criteria (pub. 27 Mar 2020) 

https://www.fitchratings.com/site/re/10112524

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0

1-https://www.fitchratings.com/site/re/968880

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10117688

Solicitation Status 

https://www.fitchratings.com/site/pr/10117688#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10117688#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE 
FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS 
FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, 
INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO