Hospitality REITs – OCBC

OVERWEIGHT, PREFER CDLHT

•ART’s portfolio is resilient

•CDLHT has better growth profile

•We favor CDLHT

Initiate with OVERWEIGHT view

We initiate with an OVERWEIGHT on Singapore Hospitality REITs. We prefer CDL Hospitality Trusts [BUY, FV: S$2.04] to Ascott Residence Trust [BUY, FV: S$1.23].

More organic growth for CDLHT

The buoyant Singapore hotel industry has been the key driver for CDLHT, whose six Singapore hotels accounted for 77% of its FY11 gross revenue. In 1Q12, CDLHT’s Singapore hotels registered an average RevPAR higher than all previous 1Qs and that quarter also marked the third consecutive one, starting from 3Q11, to set RevPAR records. We estimate that for 2012-2015 the demand for hotel rooms in Singapore will grow at 6.4% p.a., outstripping the hotel rooms supply growth, which we project will be 3.7% p.a. over the same period. We prefer CDLHT’s positioning (Upscale/Mid-tier) relative to others more clearly situated in the Mid-tier/Economy categories, as we see higher growth in hotel rooms supply for these latter tiers at 5.3%, versus 3.0% for the Luxury/Upscale categories.

ART’s master leases and management contracts

ART’s portfolio is diversified with properties in 12 countries. As of 31 Mar, 78% of its assets were spread over five countries (Singapore – 22.2%, France – 19.1%, UK – 15.9%, Japan – 12.9%, Vietnam – 8.0%). 40% of ART’s assets are in Europe. Despite the economic problems there, income from ART’s European assets is reasonably resilient, underpinned by master leases arrangements for the 17 properties in France and two in Germany, which contributed a total of 26% of gross profit for 1Q12. In addition, management contracts with minimum guaranteed income are in place for seven properties in Belgium, Spain and the UK, which contributed 12% of 1Q12 gross profit.

Lower gearing for CDLHT

Apart from its stronger potential growth profile, we like CDLHT because of its low gearing of 25.6%, versus ART’s 39.2% (enlarged portfolio excluding new Cairnhill serviced residence), which gives CDLHT more flexibility to acquire yield-accretive properties. We expect that CDLHT may make an acquisition within the next one year, either in Singapore or potentially higher yielding markets abroad.