Call for Capital

New share issue: CDLHT is issuing 130m new shares in two tranches: 1) A non-renounceable preferential offering to Singapore-registered security holders on 3 for 20 basis; and 2) A private placement to institutional and other investors. The issue price is expected to be close to 10% discount to the weighted average price for trades done for the day the placement agreement is signed. The purpose is to repay certain existing debts and for general corporate and working capital. It will also help to lower the gearing ratio, providing the REIT flexibility to make further yield accretive acquisitions.

Maintain Buy, TP S$2.81: We assume the pricing for the new tranches to be at S$2.20 per share, translating to a potential increase in capital of S$286m. This will help to offset the capital for the Novotel Clarke Quay purchases of S$201m and some other outstanding debts. The capital call will also lower their gearing. We remain positive on the stock as current hotel demand outweighs supply plus the upcoming mega projects and events will help sustain visitor arrival growth. We have raised our forecast for Singapore hotel rates to increase at a 18% y-o-y from 2007 to 2012 for RevPAR under their portfolio. Maintain Buy, target price increased to S$2.81 at parity to our DCF calculation based on fully diluted basis. This is the best stock within the property sector with the highest exposure and benefits the most from the tourism sector’s upturn.

It keeps getting bigger and better

Latest acquisition creates location synergies: CDLHT recently acquired Novotel Clarke Quay for S$201m. The leasehold prime 25-storey hotel is located in the Clarke Quay area on top of the Liang Court Shopping Podium and has a land area of 12,925.4 sq m. Comprising 398 rooms, the property offers facilities such as an outdoor swimming pool, six food and beverage outlets, conference facilities, recreation facilities and 755 shared car park lots. The property recently completed a comprehensive renovation to key public areas, restaurants and all guest rooms. This is their second acquisition from third-party owners since their IPO. This acquisition helps them to become the biggest hotel landlord in Singapore, in terms of number of rooms. All five hotels in Singapore are actually within the same cluster area of Clarke Quay/ Havelock Road area which will create a clustering effect on the portfolio and synergistic effect on the room rates.

More hotels potentially injecting to the trusts: CDLHT has a pre-set agreement with M&C and CDL related groups that all the present and future development under their group in Singapore will all contain first right of refusal. Currently, Copthorne Orchid Hotel (440 rooms) is the only one that is in operation with this clause. Future developments under this agreement include the luxurious St Regis Singapore in Cuscaden Road (299 rooms, owned by CDL/Tid/Hong Leong Group, to be opened by end 2007) as well as a hotel in Mohammad Sultan Road (350 rooms, owned by M&C, to be opened in 2008). The two, together with Copthorne Orchid Hotel, will potentially add over 1,000 quality hotel rooms to their portfolio after 2 – 3 years of maturity.

Maintain Buy, Target Price S$2.40: The inclusion of the Novotel Clarke Quay will increase their market share in the Singapore hotel section. As the current hotel demand is outweighing supply, with upcoming mega events such as Formula 1 race in 2008 and the upcoming Integrated Resorts and conventions to further fuel the visitor arrival numbers, these should greatly benefit the hotel operators in Singapore. All the above news will contribute to the growth of the company and support our 15% y-o-y increase in hotel RevPAR for the portfolio. Maintain Buy, target price of S$2.40 at parity to our DCF calculation.

Hospitality REITs – Where’s The Cream?

Hospitality, a mixed segment. Amongst the hospitality REITs which is represented by three stocks, CDL Hospitality Trust (CDREIT) provides a proxy to the tourism play, Ascott Residence Trust (ART) to the serviced residence segment, and First REIT (FIRT) to the healthcare industry. In comparison, CDREIT is very much Singapore-focused while the latter two offers a more regional exposure.

Remaking of Singapore main catalyst. Remaking of Singapore as a global city and ‘hub of hubs’ has brought about tremendous benefits to the hospitality industry and the hospitality REITs benefit in the following ways:

a) CDREIT – The tourism story in Singapore is well-known following the construction of IRs and the license to hold the Formula One Grand Prix. Hotels are set to benefit from the increase in visitor arrivals and room rates should rise in view of the short term limited supply of hotel rooms.

b) ART – Business and financial hub status of Singapore and growth of other Asian cities will spur demand for serviced apartments for expatriates and professionals. Globalization is a key factor in demand for serviced apartments in strategic locations worldwide. ART offers a regional exposure with assets in strategic locations.

c) First REIT – Beneficiary of medical tourism and Singapore as a healthcare hub with exposure to Indonesia and Singapore. First REIT has a higher yield in part of its riskier assets in Indonesia.

CDREIT to benefit in the short term. We believe that In the remaking of Singapore, tourism is a more compelling catalyst to the segment and CDREIT will benefit most in the short term. In addition, it has recently made its second acquisition of the Novotel Clarke Quay hotel since IPO, after its first acquisition of the Rendevous Hotel Auckland. The acquisition is expected to increase its DPU by 8.9% with an annualised property yield of 5.5% in FY07.

Our sensitivity analysis indicates that for every 10% increase in room rates, CDREIT’s yield will increase 0.25%-0.28%.