DBS Group Research has maintained its &lsquo overweight&rsquo rating for Singapore&rsquo s hospitality sector, with travel bubbles poised to drive international travel.

 

Analysts Geraldine Wong and Derek Tan are upbeat on the prospects for hospitality REITs, which they believe will see better performance in the H2FY2021 as the rollout of vaccines globally boosts travel demand and Singapore implements new protocols for international travel.

 

Singapore will commence the Connect@Changi business travel bubble facility this month, which   the analysts believe will provide the foundation for future border opening protocols. In addition, the World Economic Forum (WEF) will be held in Singapore in August, may be a further boost to setting Singapore up as a safe hub and may spark more events later in 2021.

 

Amidst these developments, Wong and Tan anticipate local hotels to benefit from an increase in demand for rooms.

 

&ldquo Although the travel bubble will likely be kept within the Changi precinct at the start and for the WEF to potentially be held at Marina Bay Sands (MBS), there may be a chance for other hotel operators to be appointed as &rdquo bubble hotels&rdquo to cater to these travellers, towards the medium term,&rdquo they say. 

 

Meanwhile, Wong and Tan anticipate that large domestic markets like US and the UK may see a faster rebound in travel thanks to vaccination progress reaching herd immunity thresholds by the end of 2021.

 

To that end, the analysts believe that Singapore REITs with a diversified portfolio of assets in these markets stand to gain once domestic travel restrictions ease.

 

&ldquo Hotels within large domestic markets are in the early tides of recovery based on our observation where hotels are either still operationally closed or are still ascertaining a breakeven level of room demand,&rdquo they say.

 

&ldquo We think that the trend will only be upwards from here given the rock-bottom performance in H2FY2020. With more room inventory now opened as of end-2020, most hotels are in the &ldquo ramp-up&rdquo stage but ready to welcome guests once domestic travel restrictions are lifted,&rdquo they add. 

 

Their top picks for the sector are Ascott Residence Trust (ART) and CDL Hospitality Trusts (CDLHT) due to their diversified portfolio holdings with substantial exposure to large domestic travel markets. Both stocks are rated &ldquo buy&rdquo with target prices of $1.20 and $1.35 respectively. 

 

Wong and Tan believe that valuations remain attraction at 0.82 times P/NAV despite the recent rounds of devaluation due to recovery prospects being overlooked.

 

&ldquo We anticipate the sector to re-rate strongly once domestic travel demand can be ascertained towards year-end,&rdquo they say.

CDL is &ldquo still hunting for the third asset&rdquo for its potential UK commercial Reit, to be listed in Singapore. PHOTO: CITY DEVELOPMENTS LIMITED

CITY Developments Limited (CityDev: C09 -2%) is focusing on a new chapter of growth and transformation, having booked substantial impairment losses on Sincere Property Group, hotels and investment properties. 

 

The road ahead for the Singapore-based real estate giant may include unlocking &ldquo deep value&rdquo in its London subsidiary&rsquo s hotel portfolio, nursing Sincere back to health, a potential Singapore listing of a new real estate investment trust (Reit) with UK commercial assets, and growing its presence in the private rented sector.

 

A one-off, non-cash S$1.78 billion write-down on CDL&rsquo s investment in China-based Sincere &ldquo distorted&rdquo the group&rsquo s half-year and full-year results, CDL said on Friday.

 

The impairment dragged the group into a net loss of S$1.92 billion for the second half of last year, versus a S$202.6 million profit in H2 2019. 

 

Full-year net loss amounted to S$1.92 billion for 2020, reversing from a S$564.6 million profit in the year prior. This was CDL&rsquo s first full-year loss since the early 1970s.

 

CDL hopes to put the Chinese firm&rsquo s troubles behind it soon. Executive chairman Kwek Leng Beng declared at the results briefing: &ldquo We should not keep talking about Sincere&hellip We must now forget about all these old subjects&hellip We must look forward.&rdquo

 

He added that he wants to move on to the next chapter to grow the company, and there are &ldquo many things to do&rdquo and &ldquo things are moving fast&rdquo .

 

Sincere may face significant liquidity challenges, given its debts in the next 12 months and China&rsquo s &ldquo three red lines&rdquo policy to cap borrowings for real estate developers. CDL last month formed a special working group to restructure Sincere&rsquo s loans and liabilities.

 

Earlier this week, in the first step to improve Sincere&rsquo s liquidity, CDL said it would acquire the Chinese company&rsquo s stake in Shenzhen Longgang Tusincere Tech Park.

 

For now, CDL will not pump new funds into Sincere - until the Chinese property firm has been &ldquo resuscitated&rdquo with a &ldquo stabilised&rdquo debt situation, said Goh Ann Nee, chief transformation officer in the executive chairman&rsquo s office.

 

Sincere also remains &ldquo a very good strategic platform&rdquo for CDL to expand into China, she said. She hopes to be able to provide more details on Sincere&rsquo s debt restructuring by June. 

 

Although Sincere owns many assets, consent from its chairman Wu Xu is required before CDL can monetise them &ldquo unfortunately&rdquo , he &ldquo has a different view from us&rdquo , Mr Kwek said. He hopes Mr Wu will cooperate more with CDL.

 

Mr Kwek also said there are potential white knights looking at Sincere. &ldquo Who knows, maybe Sincere might become a very ideal entity that everyone will wish to buy,&rdquo he added. 

 

Ms Goh noted that there may well be &ldquo a very interesting light at the end of the tunnel for CDL&rdquo in the China market, and write-backs could be possible in the future. Nonetheless, group chief executive officer Sherman Kwek said CDL is scaling back some investments in China until it sees how things pan out with Sincere.

 

On top of the Sincere impairment, CDL made S$99.5 million in impairment losses on hotels and investment properties last year, and a S$35 million allowance for foreseeable losses for property development projects.

 

The group&rsquo s net asset value per share was S$9.38 as at Dec 31, 2020, down from S$11.60 a year ago, as it adopts the policy of stating investment properties at cost less accumulated depreciation and impairment losses. If the group had factored in fair-value gains on its investment properties and the revaluation surpluses of its hotels, the revalued net asset value (RNAV) would be S$16.88.

 

&ldquo There is deep value in M& C&rsquo s (Millennium and Copthorne Hotels) assets, which form the bulk of these revaluation surpluses,&rdquo the group said. 

 

Mr Kwek Leng Beng noted that the M& C hotels have not been revalued and &ldquo have much upside potential to be realised&rdquo . Now that M& C is fully owned by CDL, the group will review the British subsidiary&rsquo s entire portfolio and seek to unlock the intrinsic value of the group&rsquo s RNAV &ldquo at the right time&rdquo , he added.

 

Group revenue for H2 2020 fell 43.5 per cent on the year to S$1.04 billion, with hotel operations making up 81 per cent of the decline.

 

On the fund management end, the group is still exploring the establishment of a Reit with UK commercial assets, to be listed in Singapore. 

 

First announced in March 2020, plans for this potential Reit listing were pushed back in view of the Covid-19 pandemic, &ldquo till the capital markets were more stable&rdquo , said Mr Sherman Kwek. The group&rsquo s existing commercial assets in London include 125 Old Broad Street and Aldgate House, which will be held by the Reit.

 

CDL has not confirmed the size of the Reit as it is &ldquo still hunting for a third asset&rdquo , which could come from either an acquisition by CDL or from a partner, said group chief investment officer Frank Khoo. It is trying to go for something that is &ldquo more sizeable&rdquo , given that &ldquo bigger is better&rdquo in attracting more institutional investors, he added.

 

The group is also eyeing a lower gearing. If the UK Reit lists in Singapore this year and if the group makes further divestments, &ldquo that will bring more cash onto our balance sheet and start to really bring our gearing down&rdquo , said Mr Sherman Kwek.

 

CDL&rsquo s board proposed a final dividend of S$0.08 per share for 2020, and a special final dividend of S$0.04 per share. The total full-year dividend would thus be S$0.12 a share, down from S$0.20 in 2019.

 

PROPERTY developer City Developments Limited (CDL) is acquiring a 55 per cent stake in a Shenzhen technology park from its joint-venture investment Sincere Property Group and from two entities of China Ping An for RMB 850 million (about S$174 million).

 

In an announcement on Monday, CDL said that it has entered into agreements with the three entities to acquire an 84.6 per cent stake in holding company Shenzhen Tusincere Technology Park Development Co, and will assume existing shareholders' loan proportionately. Sincere Property will continue to hold the remaining 15.4 per cent in the holding company, which controls a 65 per cent stake in Shenzhen Longgang Tusincere Tech Park. The remaining 35 per cent in the leasehold tech park is owned by a state-owned enterprise, Shenzhen Longgang District.

 

Real estate consultancy Cushman & Wakefield has valued the tech park at RMB 8.8 billion (about S$1.805 billion).

 

Sincere, which has been facing a liquidity crunch owing to the pandemic as well as tighter rules in China governing financing for real-estate developers, will reduce its gearing as a result of the acquisition, CDL said.

 

CDL' s executive chairman, Kwek Leng Beng, said: " In executing this asset acquisition, the CDL working group is accelerating efforts to implement the restructuring of Sincere Property. Our focus is to improve liquidity while limiting any additional financial exposure by CDL to the investment in Sincere Property."

 

CDL has a 51 per cent per cent stake in Sincere, with its investment to date in the Chinese property group totalling S$1.8 billion.

 

On Jan 4, the Singapore-based developer announced it was setting up a special working group to explore ways to improve Sincere' s liquidity, including through the potential divestment of assets and the restructuring of existing liabilities. The move came in the wake of a series of senior resignations, starting with former non-executive and non-independent director Kwek Leng Peck, who stepped down after disagreements with the board over the contentious investment in Sincere. Two other independent directors have also resigned.

 

The tech park, which sits on a site of 192,739 square metres (sq m), has a total saleable gross floor area (GFA) of 413,634 sq m, plus a self-held office block with a GFA of 162,144 sq m. Offices comprise about 70 per cent of the tech park, which also has commercial-titled, or SOHO, apartments (20 per cent), a retail component and nearly 4,900 car park lots.

 

It is situated north-east of Shenzhen City in Longgang District, which is home to high-tech, new technology and new manufacturing enterprises.

 

Phase 1 of the park has been completed phases 2 and 3 are ongoing and slated for completion in April next year. Construction of the self-held office block, or Phase 4, has not begun yet.

 

As at Dec 31, 2020, the pre-sold area from the first three phases totalled 224,933 sq m, with total sales proceeds of RMB 7.2 billion (S$1.48 billion).

 

CDL Hospitality Trusts' (CDLHT) distribution per stapled security (DPS) for the second half of 2020 declined by 29.2 per cent to 3.44 Singapore cents, from 4.86 cents a year ago.

 

Gross revenue was down 36.5 per cent to S$65.5 million for the six months ended Dec 31, 2020, from S$103.1 million the year before. Meanwhile, net property income (NPI) sank 46.2 per cent to S$39.6 million for the same period, from S$73.6 million a year ago.

 

The managers said the Covid-19 crisis continued to have a profound impact on CDLHT' s overall performance, severely affecting its hospitality and conference businesses.

 

Most of the stapled hospitality group' s hotels were operating at mid to low occupancies, except for five Singapore hotels and one New Zealand hotel which were supported by demand for accommodation facilities used for isolation purposes.

 

Although there was inorganic NPI contribution from the W Hotel acquisition in July 2020, the absence of contribution from the divested NCQ and Novotel Brisbane more than offset the NPI contribution.

 

Substantive contributions to portfolio revenue from the Singapore, New Zealand and Australia hotels, which amounted to S$47.8 million, partially insulated the group from the severe effects of the pandemic, the managers noted.

 

For H2 2020, total distribution to stapled securityholders after retention stood at S$42.1 million, down 28.7 per cent from S$59 million the year prior. The distribution will be paid out on Feb 26, after books closure on Feb 8.

 

Meanwhile, for the full year ended Dec 31, 2020, DPS tumbled 45.1 per cent to 4.95 Singapore cents, versus 9.02 cents a year ago, while distributable income after retention dropped 44.8 per cent to S$60.4 million. Gross revenue was 40.3 per cent lower at S$117.6 million, while NPI halved to S$69.3 million for the full year.

 

As at Dec 31, 2020, CDLHT has a gearing of 37.5 per cent and debt headroom of S$689 million - at the 50 per cent gearing limit. 

 

In Singapore, the stapled group&rsquo s average occupancy rate for six hotels including W Hotel stood at 86.1 per cent. Revenue per available room (RevPAR) was down 53.5 per cent to S$82 from S$177 a year ago. 

 

Vincent Yeo, chief executive of CDLHT' s managers, noted that with the commencement towards travel normalcy activated by the availability of the vaccines, it will still take time before mass travel is likely to resume in full force.

 

" Nonetheless, as we move towards a recovery, we believe that countries which have demonstrated strong ability to contain the situation, such as Singapore, are likely to rank among the top choice for travel and MICE events," he said.

IN one of the most stunning corporate developments at City Developments in its more than 50-year history, its non-executive and non-independent director Kwek Leng Peck left the property giant on Monday, citing his disagreements with the board and management on the group' s investment in a Chinese property group and its management of its British hotel arm.

 

The 64-year-old stepped down after more than three decades in the role.

 

He stated in his letter of resignation that he disagreed with the board and management in relation to the group' s investment in Sincere Property Group in China as well as its continuing provision of financial support to Sincere.

 

He also had reservations with the group' s approach in managing London-based wholly-owned unit Millennium & Copthorne Hotels (M& C).

 

Mr Kwek quit as a director of M& C as well, concurrent with his resignation from the parent company.

 

He is the cousin of CDL executive chairman Kwek Leng Beng and the uncle of CDL' s group chief executive and executive director Sherman Kwek, who is Leng Beng' s son.

 

Mr Kwek Leng Peck is also a director of CDL' s substantial shareholders Hong Realty (Private) Limited, Hong Leong Holdings Limited and Hong Leong Investment Holdings Pte Ltd. Including these three companies, he held directorships in about 80 entities as at Monday.

 

In a bourse filing on Wednesday, CDL noted that its investments in Sincere totalled about S$1.9 billion.

 

These include a 51 per cent joint-venture equity investment in the latter amounting to 4.4 billion yuan (S$896.8 million). It had also subscribed for US$230 million worth of bonds issued by Sincere, and provided a working capital loan of 650 million yuan.

 

The investments also include a 1.5 billion yuan liquidity-support undertaking provided by CDL for Sincere' s bonds maturing on Oct 26, 2020, as well as a 1.5 billion yuan corporate guarantee in relation to an external bank loan obtained by Sincere.

 

" The liquidity position at Sincere is challenging, being severely impacted by the Covid-19 pandemic and the property cooling measures which caused the further tightening of liquidity for real estate companies in China," CDL said.

 

As a result, the asset divestment plan for some of Sincere' s retail, hospitality, office and business park assets is now expected to take place over a longer period, it added.

 

The plan is meant to lighten Sincere' s debt load on investment properties exposure and to shore up its residential development plans to transform its platform.

 

CDL also said it is in the process of identifying and appointing an external financial adviser to assist with further evaluation and review of the group' s investment in Sincere. " The impact on the group or its financial reporting will be prepared and calibrated together with the external financial adviser," CDL said.

 

The most recent tightening of liquidity for property companies in China is what has been dubbed " Three Red Lines" these refer to metrics regarding debt that developers will have to meet if they want to borrow more, as reported earlier this month by Bloomberg.

 

Developers wanting to refinance will be assessed against these thresholds. First, there will be a 70 per cent ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract. Second, there is a 100 per cent cap on net debt to equity and third, they must have cash on hand that is at least equal to, or more than, short-term borrowing.

 

Developers will be categorised based on how many limits they breach and their debt growth will be capped accordingly. " If all three are breached, the company won' t be allowed to increase its debt in the following year," Bloomberg reported, citing a report by 21st Century Business Herald. If it passes all three, it can increase its debt a maximum of 15 per cent in the next year.

 

A Singapore stockbroking house property analyst said: " Right from the start, Sincere Group was not in a comfortable situation it was highly geared. The Chinese government has been tightening on developers' debt and I think the ' Three Red Lines' may be the last straw.

 

" There are two ways to cure Sincere' s high debt. One is to divest its assets, which is difficult at this point in time because they might not get the value they want. The other is for Sincere to get a cash injection to stay afloat so that the covenants are in line. For this, it will probably turn to its shareholders including CDL. Maybe Leng Peck feels this would be throwing good money after bad."

 

As for M& C, CDL noted that 2020 has been a difficult year for the hospitality and tourism sector.

 

In the first half of this year, the group' s hotel operations segment recorded a substantial pre-tax loss of S$208.2 million, which included S$33.9 million of impairment losses in view of the coronavirus pandemic.

 

M& C, which owns, manages and operates over 145 hotels globally, was delisted from the London bourse in October 2019 after CDL completed its privatisation exercise.

 

Market watchers note that Mr Kwek Leng Beng is not shy of being seen as having a revolving-door policy or high turnover of chief executives at M& C.

 

" My feeling is there may be some disagreement over the appointment and the frequent changing of CEOs at M& C, on the way things are being run. My suspicion is that maybe Leng Peck wants somebody to have a runway over a period of time, which Leng Beng may not want," said the stockbroking house analyst.

 

Mr Kwek Leng Peck holds 43,758 ordinary shares of CDL.

Divestment is seen as an opportunity for firm to exit market in city

 

CDL Hospitality Trusts (CDLHT) is selling its 4.5-star hotel Novotel Brisbane in Australia for A$67.9 million (S$66.4 million) to an independent third-party buyer, ADFA Brisbane.

 

The sale price is 6.9 per cent higher than the original purchase price of A$63.5 million on Feb 18, 2010, and represents a 0.6 per cent premium to the independent valuation of A$67.5 million as at Aug 31, 2020.

 

It is also at a 7 per cent discount to the property' s book value as at Dec 31, 2019 of A$73 million, which did not take into account the impact of the coronavirus outbreak on the hotel' s trading performance and outlook.

 

After the hotel' s master lease expires in April 2021, CDLHT will likely be exposed to the underlying trading conditions, noted Vincent Yeo, chief executive of the stapled group' s managers, in a Wednesday morning filing.

 

" Hence, the divestment is an opportunity for us to exit the market as Brisbane is facing near-term challenges stemming from the Covid-19 pandemic and more hotel supply coming on-stream in the coming years," Mr Yeo said.

 

The divestment " represents a good result" as it strengthens CDLHT' s balance sheet while selling an asset amid the current uncertain global tourism environment at a price that is at a slight premium to the independent valuation, he added.

 

The managers noted that the deal is in line with CDLHT' s strategy of evaluating divestment opportunities periodically to recycle capital for better return and greater financial flexibility.

 

With the essentially fixed rent structure of the property, CDLHT has achieved a recurring rental yield of at least 7.8 per cent per annum during its holding period.

 

This was computed based on fixed rent of A$4.9 million per year and the original purchase price of the property.

 

CDLHT on Wednesday inked an agreement with the purchaser for the sale, and ADFA will pay a deposit of A$3.5 million on the same day.

 

The property is operated under the Novotel brand and comprises 296 guest rooms and suites with a gross floor area of 28,049 square metres (301,917 square feet) across 15 levels, situated on a strata volumetric freehold title.

 

Located in the central business district of Brisbane city, it is within walking distance to the Central Station, Queen Street Mall, Eagle Street Pier and the Howard Smith Wharves precinct.

 

The hotel has conference facilities for up to 400 delegates, and is popular among multinational corporations, government bodies and leisure guests over major event periods and weekends.

 

The CDLHT managers plan to use the sale proceeds mainly to repay existing borrowings. Part of the proceeds may also be used to make distributions to stapled security holders to mitigate the net effect of the divestment on CDLHT' s distributable income.

 

The divestment is expected to complete on Oct 30.