July 3, 2017 / 8:32 AM / 2 months ago

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

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, July 03 (Fitch) Fitch Ratings has affirmed CDL Hospitality Trusts' (CDLHT) Long-Term Foreign-Currency Issuer Default Rating at 'BBB-'. The Outlook is Stable. CDLHT is a Singapore-based trust that owns 19 hotels with more than 5,400 rooms after its latest acquisition in Germany is completed in July 2017, and one retail mall. Although the portfolio is tilted towards Singapore, the real estate investment trust (REIT) includes hotels in the UK, Australia, New Zealand, Japan, Germany and the Maldives. CDLHT's rating is driven by the stability of cash flows stemming from its lease-based income, which includes a significant proportion of fixed rent, and its solid financing flexibility. KEY RATING DRIVERS Acquisitions Drive Cash Flows: CDLHT announced on 27 June that it has agreed to acquire an effective interest of 94.5% of the 337-room Pullman Hotel and its ancillary office and retail components in Munich, Germany, for SGD156.3 million. The trust expects to conclude the purchase in July. On 4 May, CDLHT bought The Lowry Hotel, a 165-room five-star property in Manchester UK for SGD94.7 million. Between 2013 and 2015, CDLHT spent a further SGD366 million to buy hotels in the UK, Japan, and the Maldives to diversify its portfolio geographically and increase its operating cash flows. Fitch estimates that CDLHT's EBITDA will rise to SGD134 million by end-2018 once the two new hotels contribute a full year's cash flows, from SGD123 million at end-2013. Lease Income, Fixed Rent: CDLHT's rating is supported by significant income from master-lease agreements with hotel operators, including significant minimum guaranteed rent. We expect fixed rent to reduce to 37% of revenue by end-2018 because of higher variable income from its new hotels, from 43% in 2015 and 40% in 2016. Furthermore, a significant portion of CDLHT's master-lease income is benchmarked to hotel revenue, which provides more income stability than if rent is benchmarked to profit. CDLHT's master leases typically have tenors of 15-20 years. Master leases amounting to 37% of CDLHT's 2016 rental income are due for renewal in the next three to four years, and include built-in renewal options for a further 15-20 years or more. CDLHT bought five properties through its business trust, out of the 14 it acquired since its IPO, where CDLHT is responsible for all operating costs of these hotels. In Fitch's opinion, the lower cash flow stability of this ownership method is mitigated by the increase in CDLHT's asset scale and geographic diversity. Improving Geographic Diversification: Fitch expects CDLHT's Singapore hotels to account for a lower share of its net property income (NPI) of around 55% in 2018, factoring in full years' income from the two new hotels purchased in 2017. The Singapore hotels accounted for 66% of CDLHT's NPI in 2015, and 62% in 2016. Operating conditions for the Singapore hotels have remained challenging in the last few years due to the high supply of new rooms even as demand faltered. We expect Singapore hotel earnings to bottom out in 2017 as the supply of new hotel rooms is due to fall sharply next year and visitor arrivals to Singapore remain healthy. Revenue per available room for the Singapore hotel sector stabilised in 1Q17 compared with 2016, supported by an increase in occupancy rates to 86% from an average of 84% over this period. Increased Rating Headroom: CDLHT's rating headroom will improve significantly following the expected completion of its SGD255 million rights issue in early August 2017. The trust's sponsor Millennium & Copthorne Hotels plc has committed to take up its 37% share of the rights, and DBS Bank Ltd. (AA-/Stable) has underwritten the balance. CDLHT expects to utilise most of the proceeds to repay existing borrowings and reduce its loan-to-value ratio (LTV, defined as net debt/property assets). Solid Financial Flexibility: We expect CDLHT's LTV to reduce to 34% upon the successful completion of the rights issue and the purchase of the Pullman Hotel Munich, from our estimate of 39% as of end-June 2017. We expect CDLHT to maintain its LTV at around 40% or so in spite of any future acquisitions, which affords it some headroom under the regulatory threshold of 45%. This will mean that FFO fixed-charge cover should remain between 5.5x-6.0x, and FFO adjusted net leverage could hover between 6.5x and 7.0x. We expect CDLHT's properties to remain largely unencumbered, enabling it to maintain robust financing flexibility. The ratio of unencumbered assets/unsecured debt is likely to remain healthy at more than 2.0x in the next two years. DERIVATION SUMMARY CDLHT's rating is one notch lower than that of Host Hotels & Resorts Inc. (Host Inc, BBB/Stable). Host Inc. is a US-based hotel REIT that has a stronger business profile than CDLHT but similar financing flexibility, which drives the rating difference. Host Inc. owns a portfolio of more than 90 luxury and upper-upscale hotels mostly in the US. CDLHT has a considerably smaller property portfolio of 19 hotels and one retail mall, although this portfolio is more geographically diversified. The risks from CDLHT's smaller portfolio are mitigated by the trust's predominantly lease-based income and lower share of hotel operating costs, which results in more stable cash flows and higher EBITDA margins of 64%-65%. Comparatively Host Inc.'s cash flows stem from its sole investment in its hotel owner-operator Host Hotels & Resorts LP, resulting in Host Inc. being fully exposed to the income and expenses of its hotels, as reflected in its considerably lower EBITDA margins of 26%-27%. Both trusts benefit from strong financing flexibility as evidenced by FFO fixed-charge cover of more than 6x, net debt/ property value of between 35%-40%, and their mostly unencumbered property portfolios. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 9% in 2017 and 6% in 2018, stemming from new acquisitions made in 2017 - Occupancy of Singapore properties to stabilise at around 84%-85% in 2017-2018 - Refurbishment and maintenance capex to remain around 10% of revenue - EBITDA margin to remain around 65% 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 Comfortable Liquidity: CDLHT had a SGD90.2 million committed, unutilised, multi-currency revolving credit facility at its disposal at end-March 2017, and a further SGD300 million uncommitted multi-currency bridging loan facility at its disposal. In addition, CDLHT secured a new uncommitted SGD200 million multi-currency bridge loan facility in 2Q17 to acquire The Lowry Hotel in May 2017, and approximately SGD105 million of this facility is also available to be drawn if required. The trust does not have any borrowings maturing in 2017, and we expect it to comfortably meet our expectations of negative FCF in the next 12 months. CDLHT will utilise part of its multi-currency bridging loan facility to complete the acquisition of the Pullman Hotel Munich in July 2017, which it then expects to refinance using longer-tenor borrowings. We expect the trust to be able to roll over its maturing debt in 2018 given its healthy performance to date, and solid financing flexibility. 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 +6221 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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