CDL H-Trust – DBSV

M-plifying growth

• Studio M hotel acquisition is attractive; initial yield of 6.1% has more upside

• Singapore exposure deepens; contributes 82% of forward earnings

• BUY, TP S$2.30 maintained

Buying Studio M Hotel for S$154m. CDL Hospitality Trust (“CDL HT”) is acquiring the 360-room Studio M hotel for S$154m or $428k/key. The hotel comes with a master 20 years lease, renewable for 70 years. The revenue sharing lease structure is pegged at 30% of hotel revenues + 20% of gross operating profit, with earnings downside protected through a fixed rent component amounting to S$5m. The vendor has guaranteed net rent of S$9.24m (c6.1% initial yield) for the first 12 months of operations under CDL HT.

Attractive deal to strengthen Singapore’s portfolio. This acquisition is considered attractive with an initial yield of 6.1%, above its implied yield of 5.85% and we believe there are avenues for further growth. Studio M’s average room rate of S$174/night is lower than industry average and we see more upside in 2011 backed by a sustained high occupancy of 88.9%. Its Singapore portfolio, which contributes a lion 82% share of topline, will continue to be the main driver of organic growth over the next 2 years.

Tweaked earnings, gearing is still low at 26%. Given the trust’s low gearing level of 20%, this acquisition will be debt-funded at an estimated cost of c3%. Gearing will head up to 26% post-acquisition, but still below management’s longer-term optimal level of 30-35%.

Maintain BUY and DDM-based TP of S$2.30. With Studio M hotel, CDL HT will further consolidate its pole position as Singapore’s largest hotel owner (c6% of Singapore room inventory) and continue to be the prime leverage on the robust tourism outlook in Singapore. CDL HT currently offers a yield of 6.1-6.8%.