OREANDA-NEWS. Fitch Ratings has affirmed CDL Hospitality Trusts' (CDL) 'BBB-' Long-Term Foreign-Currency Issuer Default Rating (IDR) with a Stable Outlook.

KEY RATING DRIVERS
Healthy Financing Flexibility: The affirmation is supported by CDL's financing flexibility, despite operating challenges in its key markets. Its net debt/investment property ratio (LTV), FFO fixed-charge coverage, and unencumbered assets/unsecured debt stood at 33%, 7.3x, and 3.0x, respectively, at end-2014. This provides CDL with some rating headroom should market conditions remain weak. Fitch estimates that CDL's LTV and FFO fixed-charge coverage is resilient against a 100bp spike in market interest rates and cap rates, all else remaining equal.

Challenges in Key Markets: The Singapore hospitality market has remained under pressure since 2013 on account of rising hotel room supply. The market weakened further in 2014 because of falling tourist arrivals from its key inbound markets of Indonesia and China, due in turn to slowing economic growth. Fitch expects the demand/supply imbalance in the Singapore market to persist through 2017, as hotel room supply is likely to increase by a compound annual growth rate of 4.9%, while the growth in annual tourist arrivals should be lower (2014: -3%; YTD April 2015: -5%, on a seasonally adjusted basis).

Reducing Rating Headroom: CDL's rating headroom came down in 2013 and 2014, driven by its leveraged acquisition of new hotels - in a bid to diversify away from exposure to Singapore's weakening market conditions and to rebalance its capital structure. Acquisitions have been incrementally yield-accretive, but not offseting the falling revenue in Singapore, as well as in Australia - together, these countries accounted for about 74% of CDL's revenue in 2014. We expect CDL's exposure to Singapore and Australia to decline to around 67% by 2016, supported by growth in the Maldives and Japan.

About 44% of CDL's income consists of fixed rent, which also helps to mitigate earnings volatility. CDL's fixed rent covered its interest expense by 4.3x in 2014. Over 60% of debt was contracted at fixed interest rates as of April 2015, with 21% of such debt subject to re-contracting in 2015. The remainder of fixed-rate debt comes up for re-contracting/re-financing in 2018 and thereafter. These features provide strong protection to CDL's fixed-charge cover in the event market interest rates rise.

FX Risk Mitigated: The currency mix of CDL's revenue closely matches that of its borrowings, providing a natural mitigation of foreign-currency risk. Fitch expects around 20% of CDL's 2015 revenue to stem from its Maldives assets, which generate revenue in US dollars, and should help mitigate a potential weakening of global currencies against the greenback in the short to medium term. We expect revenue from CDL's assets in Australia, New Zealand, and Japan to account for a further 8%, 6%, and 5%, respectively in 2015.

RATING SENSITIVITIES
Positive: No positive rating action is likely in the medium term, owing to the potential for operating weaknesses across most of its operating markets - which we expect will persist through 2017.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Heightened interest-rate risk, as evident from FFO fixed-charge cover sustained below 4x
- FFO-adjusted net leverage sustained above 6.5x (2014: 6.1x) and LTV sustained above 40%-45%
- Unencumbered assets/unsecured debt sustained below 2x
- A sustained weakening in CDL's competitive position, evident from sustained and significantly weaker revenue per available room (RevPAR) across its properties