Going strong

With more attractions and events lined up, we share management’s optimism on the local hospitality industry during its briefing. We also like management’s selective and value-driven approach towards acquisitions. CDLHT remains ourtop pick among the S-REITs.

We raise DPUs by 1% on higher REVPARs, offset partially by lower payouts. Backed by conservative book valuations, valuations are not excessive at 1.1x P/BV vs. a long-term average of 1.3x. Maintain OP. We see catalysts from stronger REVPARs and accretive acquisitions.

What Happened

An upbeat management shared its observations and views on the local hospitality industry. Backed by sustained demand from corporates and tight occupancy, management guides that the industry has been able to increase corporate renewal rates by an average of 5%. While upcoming room supplies may pose competition, the deferment of some projects could take some of the heat off. Meanwhile, management remains highly selective and value-driven towards acquisitions. It believes that local transacted values of S$900k per room are excessive and does not see reason to partake given the pipeline from its sponsor. Payouts should be at the low end of 90+% and will continue to match retained earnings against maintenance capex needs to improve efficiency and margins.

What We Think

Backed by events and tourist attractions, resilient Asian economies and moderate upcoming room supplies, the outlook for hospitality remains positive. We continue to like management for its prudence while a strong balance sheet (asset leverage of 25.3%) provides debt headroom for acquisitions and AEI (e.g.Orchard Hotel Shopping Arcade after the finalisation of plans).

What You Should Do

While the stock has been re-rated16% since our last note in Dec 11, we continue to see value at 1.1x P/BV vs. its long-term average of 1.3x. Book valuations of about S$600k per room key for its local properties remain highly conservative when benchmarked against theS$900k per room key (implied cap rate of <5%) in some market transactions. Maintain Outperform.

CDLHT’s DPU rises 5.8% in fourth quarter

Its S’pore hotels, excluding Studio M, post Q4 RevPAR of $205, up 6%

CDL Hospitality Trusts (CDLHT), which has posted a 5.8 per cent year-on-year rise in distribution per stapled security for Q4 2011, continues to look for acquisition targets in Asia Pacific markets.

‘Singapore still remains our favourite market in terms of visibility and prospects,’ said Vincent Yeo, CEO of M&C Reit Management, the manager of CDLHT, at a media briefing yesterday.

The stapled group posted distribution per stapled security of 2.94 cents for Q4 2011, up 5.8 per cent from the same year-ago period. Over the same period, CDLHT’s gross revenue rose 13.4 per cent to $37.8 million – thanks to improved hospitality performance across the portfolio and contribution from Studio M Hotel in Singapore, which was acquired in May last year

Net property income for Q4 improved 12.7 per cent year-on-year to $35.5 million.

The stapled group, which makes semi-annual payouts, will distribute 5.71 cents per stapled security for the July 1-Dec 31, 2011 period, or 7.5 per cent higher than the same year-ago period. The payout for H2 2011 will comprise 5.33 cents of taxable income and 0.38 cent tax-exempt income. The counter ended 6.5 cents higher at $1.775 yesterday.

The group’s Singapore hotels achieved strong performance for Q4 as well as full-year 2011. Fuelled by the growth in visitor arrivals, revenue per available room (RevPAR) of the hotels here, excluding Studio M, rose 6 per cent year-on-year to $205 in Q4 2011, the highest Q4 RevPAR since CDLHT’s inception in 2006, supported by high average occupancy of 88.6 per cent in the quarter. Including Studio M, the RevPAR for the Singapore hotels increased 6.1 per cent to $200 in Q4 2011.

Full year 2011, the Singapore hotels’ RevPAR (excluding Studio M) climbed 6.9 per cent to $204, just a tad below the all-time high annual RevPAR of $207 achieved in 2008.

This was despite an increase in hotel room supply in Singapore and room nights being taken out of Orchard Hotel’s inventory during the year for refurbishment. Excluding Orchard Hotel, the RevPAR growth would have been higher at 10.2 per cent in FY 2011 compared to a year ago.

The group’s five Australian hotels – in Brisbane and Perth – also continued to perform strongly, bolstered by the buoyant natural resource sector and static supply of hotel rooms.

Full-year 2011 gross revenue rose 15.4 per cent to $141.1 million. Net property income improved 17.5 per cent to $135.2 million. Distribution per stapled security climbed 8.3 per cent to 11.05 cents.

Last year, the group finished refurbishing the 331-room Claymore Wing of Orchard Hotel. By mid-January 2012, it also completed upgrading all the rooms at Novotel Clarke Quay. Asset-enhancement initiatives this year are likely to focus on less ‘visible’ back-of-house works like chiller replacements to boost hotel efficiencies and create energy savings, says Mr Yeo.

Last year, CDLHT retained 10 per cent of its income available for distribution as working capital to fund capex on asset enhancement initiatives, resulting in a payout ratio of 90 per cent. A ‘good guide’ on 2012’s payout ratio is the low-90s, says Mr Yeo.

M&C Reit Management acknowledged that the outcome of the European debt crisis, the depth of the recession in some European countries and the health of the US economy may have an impact on Asian economies which may affect visitor arrivals and the hospitality sector.

‘There are indications in the market that some companies are exercising caution about travel budgets in view of the economic uncertainty,’ it added.

On the flip side, the range of new attractions in Singapore – including the first phase of the Gardens by the Bay and the River Safari – as well as the stronger events calendar in 2012 could continue to draw visitors to Singapore, it added.

Ending on a high

4Q11REVPARwas a record for the fourth quarter.Backed by a transformed tourism landscape, a larger dependenceon Asian travellers and resilient Asian consumption, we expect arrivals and REVPAR to hold upin 2012, despite headwinds.

4Q/FY11 DPU meets consensus and our forecasts, at 26/97% of our FY11. The slight miss in the full-year figure was due to higher retained income. We keep our DPUs and DDM target price (disc. rate: 8.6%) pending an analysts’ briefing, and introduce FY14 numbers. Maintain OP.

Ball still in hoteliers’ court

We are still expecting 3-5% growth in arrivals which should keep hotel occupancy at 84-86%, given a moderate 4% expected increase in rooms this year, which should allow hoteliers to raise rates. 4Q11 REVPAR of S$205 was its highest for 4Q (+6.0%), mainly on room-rate increases (+7.7%) to S$232, though occupancy dipped 1.4% pts yoy to 88.6%. Qoq performance was boosted by a return of rooms after the completion of upgrading work at Orchard Hotel, its largest asset.

Strong balance sheet

Asset leverage dipped to 25.3% from 26.5% on asset revaluations across its local and Australian properties. This positions it for debt-funded acquisitions and AEI. Management has remained prudent in retaining a larger portion of income (10% vs. 9% in FY10) to fund capex and working capital.

Trading below long-term average

While the stock has been re-rated by 16% since our last note in Dec 11, stock is still trading at 1.1x P/BV vs. its long-term average of 1.3x. Book valuations of about S$600k per room key for its local properties do not appear excessive especially when benchmarked against that of S$900k per room key for some market transactions.

More than meets the eye

• “Debunk” street’s view that CDL H’s portfolio RevPAR has been lagging industry peers in recent quarters

• Positive data points; we remain cautiously optimistic on prospects in 2012

• Maintain BUY and DDM-based TP of S$1.85

Not as bad as what street thinks. The recent stellar hotel performances from the two integrated resorts in 2Q/3Q 2011 have been eye catching. Contributing close to 9.8% of Singapore’s inventory, we believe these numbers could have skewed recently reported tourism statistics. Stripping out contributions from the two IRs, it is clear that CDL HT’s hotels operational data (in terms of occupancy levels, RevPAR) continue to remain above its industry peers rather than underperforming as thought previously by most on the street.

Corporate updates have been positive to-date. While the 2 IRs continue to attract occupancies of over 90%, even at above than industry’s room rates, we could potentially see hoteliers turn more confident about holding rates firm rather than drop rates going forward. With the potential spillover demand from the recent holiday season and an expected strong line-up of conferences and events, we estimate total visitors to continue growing at a rate of 4-7% y-o-y. Unlike an expected flattish industry performance, CDL HT is projected to deliver 0-5% y-o-y growth in RevPAR, leveraging on the recently completed refurbishment program (Orchard Hotel and Novotel Clarke Quay) and full year contribution from Studio M hotel.

Maintain BUY and DDM-based TP of S$1.85. We maintain our Buy rating in anticipation of potential earnings surprise, hinging on faster than expected recovery in the global economic environment. In addition, given its relatively low gearing of 26% and an implied yield of close to 5.7%, CDL HT stands ready to acquire hotel assets opportunistically which we believe will be accretive to unitholder distributions.

Favourable risk-reward

The local tourism scene differs fromwhat it was during the last crisis. Backed by fairly resilient Asian consumption, we expectarrivalsand REVPAR to hold up. Investors,however,appear to have priced in the worst with the REIT down 30% from its peak.

We judiciously shave REVPAR, factoring in flat rates, lower visitor growth and hotel occupancy for FY12. This lowers our DPU estimates and DDM-based target price (disc. rate: 8.6%). Maintain Outperform, nevertheless, on a favourable risk-reward trade-off.

Not expecting 2008/9

We deem the local tourism scene different from what it was during the last crisis, with more positives than before. The two integrated resorts are running in full steam and continue to offer different experiences for both leisure and business travellers. There are more attractions to come on top of the government‟s continual investments to woo the tourism dollar. 2009 was hit by a double whammy of an economic slowdown and H1N1. Further, with a higher dependence on growing regional economies, we believe visitor arrivals and REVPAR can hold up even as growth in Western economies slows.

Dynamics still positive

We are expecting 3-5% growth in arrivals which should keep occupancy at 84-86%, given a moderate 6% increase expected in rooms next year. Even if arrivals are flat next year, occupancy should remain above 80%, allowing hoteliers to raise rates.

6% yields even if pegged at the worst

We project a moderate 5% decrease in REVPAR, assuming flat room rates and industry occupancy rates, though upside could come from stronger rates after the refurbishment of Orchard Hotel, CDLHT‟s largest asset. Recent guidance suggests that corporate rates could be pushed up given tight occupancy. The share price, however, appears to have priced in the worst with the REIT down 30% from its peak. Offering a decent 6% yield even if we were to peg its local assets at the levels of the last crisis, we see a

fairly attractive entry point.