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.

Economic slowdown has been priced in

• 3Q11 revenue $36.4m, NPI $34.0m, distributable income $26.6m

• 3Q11 DPU of 2.77 cents

• Trim FY12/13 DPU by 1.6-2.5% and raise cost of equity to 10%

• Cut target price to S$1.470 but maintain Hold

3Q FY11 results

Gross revenue of $36.4m and net property income (NPI) of $34.0m was registered in 3Q11, a double-digit growth of 15.2% y-y and 12.7% y-y from the corresponding period last year. Distributable income (with a reduction of retained earnings for working capital) was up 9.9% y-y to $26.6m. This presented a DPU of 2.77 cents for 3Q11, bringing 9M11 dividend payout to 8.11 cents. This constitutes 72% of our FY11 estimates. Excluding Studio M Hotel, average occupancy rate (AOR) for Singapore Hotel fell by 2.1%-pts to 89.5% in 3Q11 compared to the year before. Average daily rate (ADR), a laggard relative to AOR, turned in $236 (+8.8% y-y), and boosted the revenue per available room (RevPAR) to $211. This was the highest RevPAR recorded since last high of $222 in 2Q08, prior to the global financial crisis. On the retail front, Orchard Hotel Shopping Arcade posted 97.4% in occupancy with an average monthly rental rate of $7.20 per sq ft. CDL HT's overseas Hotels in New Zealand and Australia saw NPI rose in the region of 4.0-7.9% and contributed 19.8% to the total NPI in the reporting quarter.

Moderating the prospect of Singapore hospitality sector

In view of the turbulences in the western countries, we examine two possible scenarios – 1) base-case (global economic slowdown) and 2) pessimistic (double-dip recession) – that might occur in 2012. In our base-case scenario, we expect tourist arrivals for 2012/2013 to grow at a slower compound rate of 2%/6% respectively as opposed to Singapore Tourism Board (STB)'s CAGR of 7.9% based on the forecasts of 17 million visitors by 2015. With steady pipeline of 3,274 and 2,536 rooms to be added to the hotel inventory over the next two years, occupancy is expected to drop to 83% in 2012/13. RevPAR for CDLHT is likely to slip to lower region of $190. In our pessimistic scenario, we expect annual tourist arrivals to fall 8% in 2012 and recover 10% in 2013. Occupancy is expected to take a plunge to 75%/78% and translate to lower RevPAR of $146/$156 in 2012/13.

Valuation

Given our base-case scenario, we trim our FY12/13 DPU by 1.6-2.5% in consideration of milder growth in tourist inflows. To account for increased macro-economic risk, we raise our cost of equity to 10% and slash our target price to $1.47. We will continue to monitor the market condition and reserve our recession target price of $0.92 in the event of further deterioration in global economies. Based on previous closing price of $1.52, we maintain our Hold recommendation.

CDLHT’s Q3 distribution per security up 9.1%

Distribution per security at 2.77 cents; group projects mixed outlook for the sector

CDL Hospitality Trusts, which posted a 9.1 per cent year-on- year increase in distribution per stapled security for the third quarter ended Sept 30, 2011, yesterday pointed to some headwinds for the Singapore hotel market ahead.

First, the 5.6 per cent projected increase in net hotel rooms inventory in Singapore next year is expected to contribute to a more competitive environment. On the demand side, the outcome of the European debt crisis and the health of the US economy may have an impact on Asian economies which may affect visitor arrivals and the hospitality sector, the stapled group said. ‘There are indications in the market that companies are becoming more cautious about travel budgets in view of the economic uncertainty,’ CDLHT said.

On a more upbeat note, it said that the Singapore hospitality sector is expected to continue to benefit from the addition of new leisure attractions, including the two recently launched US night clubs at Marina Bay Sands and the upcoming opening of the Transformers ride at Universal Studios Singapore.

CDLHT posted distribution per stapled security of 2.77 cents for Q3 2011, up 9.1 per cent from the same year-ago period. The stapled group, which makes distributions semi-annually, will not be making a payout for Q3.

It owns six hotels in Singapore – Orchard, Grand Copthorne Waterfront, M, Studio M, Copthorne King’s and Novotel Clarke Quay – and Orchard Hotel Shopping Arcade. Also in CDLHT’s portfolio are Rendezvous Hotel Auckland and five hotels in Brisbane and Perth.

For the first nine months of 2011, the distribution per stapled security is 8.11 cents, up 9.2 per cent y-o-y. The Q3 and nine-month distribution figures reflect payout ratios of about 90 per cent, as CDLHT is retaining about 10 per cent of income available for distribution as working capital to fund its capital expenditure requirements.

The distribution per stapled security for Q3 2011 and for the first nine months of 2011 translate into annualised distribution yields of 7.23 per cent and 7.13 per cent respectively, based on CDLHT’s $1.52 closing price yesterday. The counter slipped three cents yesterday. CDLHT’s results were released yesterday morning before the stock market opened.

In a note yesterday, Standard Chartered Bank analysts said they are reducing distribution per stapled security estimates for 2012-14 by 17-23 per cent as they now expect CDLHT’s portfolio revenue per available room (RevPAR) to fall 20 per cent next year before recovering by 10 per cent in 2013. ‘While our economists expect our key tourist markets to have economic growth of 5-6 per cent in 2012, we think Singapore could see a 2-4 per cent decline in tourist arrivals in 2012 if these economies grow slower than expected.’ It added that CDLHT has priced in a 21 per cent decline in RevPAR in 2012.

Year to date, the counter is one of the main underperforming Singapore Reits, falling 26 per cent compared with the Singapore Reit Index decline of 10 per cent, Stanchart added.

The stapled group’s gearing ratio rose from 21.1 per cent at end-September 2010 to 26.5 at end-September 2011.

For Q3 2011, CDLHT posted a 9.9 per cent y-o-y rise in income available for distribution to $29.6 million – of which $2.96 million will be retained as working capital to fund the capex, leaving about $26.65 million to be paid to security holders.

Gross revenue climbed 15.2 per cent to $36.4 million for Q3 2011 – due to improved hospitality performance across the portfolio and contribution from Studio M Hotel, acquired in Q2 2011 and which accounted for about $2.8 million of the gross revenue increase.

Net property income (NPI) posted a 12.7 per cent y-o-y rise to $33.99 million in Q3, due chiefly to the revenue boost from Studio M Hotel and contribution from the overseas properties. All hotels except for M Hotel, Copthorne King’s Hotel and Orchard Hotel recorded an improvement in NPI. For the first two properties, the drop was due to the absence in Q3 2011 of writebacks of property tax accruals booked in Q3 2010.

Orchard Hotel’s NPI slipped primarily because of a refurbishment which saw 2,268 rooms nights being taken out of its inventory during Q3 2011. In fact, Orchard Hotel was the only one of CDLHT’s Singapore hotels which registered a drop in RevPAR to the tune of 2.3 per cent in Q3 2011 over Q3 2010.

Overall, the Singapore hotels (excluding Studio M Hotel) posted 6.2 per cent y-o-y growth in RevPAR to $211 in Q3 2011. This is the second highest RevPAR that CDLHT has achieved in a quarter since its inception in 2006 – despite the weakness in travel demand in August. ‘Aside from the usual slowdown of travel from the western hemisphere due to the August summer holidays, three public holidays in Singapore in August 2011 – compared to only one in the same period last year – also curtailed business travel during the month,’ CDLHT said. Studio M Hotel continued to do well in Q3 2011, achieving RevPAR of $173, reflecting y-o-y growth of 13.6 per cent.

For Q3 2011, the group’s Singapore hotels (including Studio M) posted a 14.6 per cent y-o-y hike in combined hotel revenue to $81.5 million. Gross operating profit for the Singapore hotels rose 17.9 per cent y-o-y to $44.2 million in Q3 2011.

Backend-loaded contributions

While industry dynamics could weaken, we expect theimpact to be softened by upcoming tourist attractions, stronger Asian visitor arrivals and a refurbished Orchard Hotel. Balance sheet remains strong.We see value after its recent sell-down.

3Q11/9M11 DPU meets consensus and our forecasts, at 24%/70% of FY11. We expect backend-loaded contributions from a refurbished Orchard Hotel. Expecting lower REVPAR and payouts, we cut our DPU and DDM target (discount rate 8.6%). Still, maintain Outperform.

Completion of Orchard Hotel AEI

We expect the completion of upgrading work (mid-Sep 11) at its largest asset, Orchard Hotel, to buffer any softening in business in upcoming quarters. REVPAR for its local hotels expanded 6% yoy to S$211 or its second highest in history. Growth would have been stronger if not for upgrading work at Orchard Hotel, which took away 2,268 room nights (4%/1% of Orchard Hotel/total inventory) and weaker business travel in Aug.

Not expecting a repeat of 2009 yet

We do not expect a repeat of 2009 in
terms of tourist declines just yet with regional economies still expected to grow (albeit slower) and tourist arrivals in past months still fairly unscathed. We are, however, lowering REVPAR assumptions to factor in some slowdown. Management notes continued strong demand in Jul-Sep and attributed the less exuberant quarter to a weaker Aug from the presence of more public holidays this year.

Ammunition from strong balance sheet

We believe CDLHT’s low asset leverage of 26.5% continues to position it for debt-funded acquisition. Management remains prudent in retaining income to fund capex. With increased macro uncertainties, we are reducing distribution payout to 91% in FY12 (same as FY11) from 95%.