Reuters logo
Fitch Affirms CDL Hospitality Trusts at 'BBB-'; Outlook Stable
July 3, 2017 / 8:32 AM / 5 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: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here 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. 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 here. 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 © 2017 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

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below