2H24 Results Overview: CDL Hospitality Trusts (CDREIT) reported a dismal performance for the second half of 2024 (2H24), with its Distribution Per Unit (DPU) falling 11.9% year-on-year (yoy) to 2.81 Singapore cents, which was below expectations. The underperformance was attributed to weaknesses in the Singapore and New Zealand markets, where Revenue Per Available Room (RevPAR) declined by 10% and 7% yoy, respectively. The total revenue for the period decreased by 3.9% to S$132.9 million, while Net Property Income (NPI) dropped by 9.0% to S$68.7 million, impacted by margin erosion in Australia and the UK. Distributable income fell 10.9% to S$35.4 million, mainly due to a 19.7% increase in finance costs.
Performance by Region:
- Singapore: RevPAR fell by 10% yoy to S$195 due to competition and weak demand following an exceptional post-pandemic recovery. Occupancy dipped 4 percentage points to 79.1%, and NPI decreased by 7% yoy to S$43.8 million.
- New Zealand: RevPAR declined 11% to NZ$121 due to the ongoing Asset Enhancement Initiative (AEI) at Grand Millennium Auckland, reducing room inventory by 20%. NPI fell 42% to S$2.1 million.
- Japan: Benefitted from strong leisure demand, with RevPAR surging 17% yoy to ¥10,949. NPI grew 9% yoy to S$2.3 million.
- UK: Newly acquired hotels showed a 3% yoy RevPAR growth to £148, but NPI decreased by 2% yoy to S$8.7 million due to higher payroll costs.
Strategic Developments:
- Rental Housing Contribution: The Castings, CDREIT’s 352-unit build-to-rent project in the UK, achieved 59% occupancy as of December 2024. Leasing momentum is expected to stabilize by 3Q25, with a projected NPI yield of over 6%.
- Expansion into Student Accommodation: CDREIT completed the acquisition of a purpose-built student accommodation (PBSA) property in Liverpool, UK, with 404 beds and adjacent land for a potential 144-key hotel or additional PBSA units. This acquisition is expected to be accretive to pro forma 1H24 DPS by 1.3%.
Financial Forecast and Valuation: CDREIT has adjusted its DPU forecast for 2025 and 2026 downward by 17% due to lower RevPAR expectations in Singapore and reduced NPI margins in Australia and the UK. Despite a 22% decline in stock value during 2024 and an additional 7.6% drop year-to-date, CDREIT maintains a BUY rating with a target price of S$1.00, offering a 2025 distribution yield of 6.8%.
Outlook and Catalysts: The outlook for CDREIT is cautiously optimistic:
- Positive Trends in Singapore: Visitor arrivals in Singapore rose by 13% yoy in January 2025. The continued recovery, supported by new attractions and MICE events, is expected to drive RevPAR growth.
- Yield Accretive Acquisitions: Contributions from recent acquisitions, including rental housing and student accommodation, are anticipated to enhance overall returns.
- Cost of Debt and Financing: The average cost of debt eased to 4.0% in 4Q24. With 32% of borrowings hedged to fixed rates, the cost of debt is expected to stabilize between 3.75% and 4.00% in 2025.
Investment Recommendation: Despite the recent challenges and valuation corrections, CDREIT offers long-term growth potential driven by its strategic expansion into rental housing and student accommodation. The anticipated recovery in key markets, supported by improving visitor arrivals and yield-accretive acquisitions, positions CDREIT for a potential rebound. The recommendation remains BUY with a target price of S$1.00 for an upside of 25.8%.
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