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Fitch: CDL Hospitality Trust's Purchase Increases Diversification
May 9, 2017 / 8:08 AM / in 5 months

Fitch: CDL Hospitality Trust's Purchase Increases Diversification

(The following statement was released by the rating agency) SINGAPORE, May 09 (Fitch) CDL Hospitality Trust's (CDLHT, BBB-/Stable) acquisition of The Lowry Hotel in Manchester, UK, will help to increase the geographic diversification of its cash flows, Fitch Ratings says. The debt-funded acquisition is neutral for CDLHT's ratings, because its financial profile will remain comfortably within the rating parameters. The acquisition is earnings accretive, but will slightly reduce the proportion of revenue from fixed-rent (2016: 38% of total revenue), which will increase the variability of CDLHT's cash flows. CDLHT said on 4 May 2017 that it has completed the acquisition of the 165-room, five-star hotel. Fitch believes that the acquisition fits with CDLHT's strategy to enlarge its global footprint, and builds on the CDLHT's 2015 acquisition of the hotel in Cambridge, UK. Fitch expects the Lowry Hotel to benefit from Manchester's burgeoning regional economy, which is the second largest in the UK, and its position as a key industrial, education, and leisure hub. Manchester stands to benefit from the UK's initiatives to develop its northern cities, which should drive improvements in transport links, boost investments in science and innovation, and help rebalance the UK's economy following its planned exit from the European Union. Fitch expects the Lowry to perform strongly, despite the increase in supply of new hotel rooms over the medium term, with more than 1,600 new rooms expected in 2017. According to industry research, a substantial part of this new supply will be in budget hotels, which are not direct competitors for the Lowry. The Lowry Hotel reported a 6.9% increase in revenue per available room (RevPAR) in 2016 due to the strong corporate and leisure demand, and also as a result of the refurbishment of its rooms in 2015 and in 2H16. After the acquisition, CDLHT's net property income (NPI) from the well-supplied Singapore hospitality market will reduce to 59% from 62%, while NPI from the UK will increase to 11% from 6% on a pro forma basis for 2016. In contrast to the Lowry Hotel's performance, RevPAR of CDLHT's Singapore hotels contracted 8.6% in 2016, and 0.8% in 1Q17. The Lowry Hotel's 2016 NPI was GBP3.8 million (around SGD6.8 million) and provides for a NPI yield of 7.3%, compared to a NPI yield of 5.7% for CDLHT's portfolio at end-2016. The total purchase price of approximately SGD94.7 million includes estimated net working capital and cash of the company holding the asset. On a pro-forma basis post-acquisition, CDLHT's regulatory gearing ratio (debt/assets) will increase to 39.1% from 36.8% previously. This is still well below the regulatory ceiling of 45%, which affords CDLHT more headroom for growth. Fitch estimates that on a pro forma basis CDLHT's FFO fixed-charge cover will remain healthy at more than 5x after the acquisition (2016: 5.9x), which is comfortably more than the 4x threshold below which the agency may consider negative rating action. Contact: Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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