CDL H-Trust – MS

Recovery Under Way

Impact on our views: We maintain our Equal-weight rating on CDLHT. At current levels, CDLHT offers investors a 4.7-5% dividend yield for FY09e-FY10e compared with 6-6.5% of the other commercial S-REITs under our coverage. The improvement in RevPAR trends is certainly encouraging, and is witnessed across the Singapore market, but we believe expectations of a RevPAR recovery are already in the price.

What’s new: 9M09A Gross revenue and Net property Income was 73% and 74% of our full-year estimates, but Distributable income is already 79% of our estimates due mainly to the addback of an exchange loss to distributable income that we did not account for. RevPAR continues to improve on a quarterly and year-on-year basis with QoQ +15% (2Q09: -11%) and YoY –28% (2Q09: -40%). The main driver of RevPAR growth in 3Q09 was an improvement in occupancy to 86.1%, up 10.6ppt from 2Q09. Rates have stayed stable at 179 from 178 in 2Q09, which supports our thesis that occupancy has to remain high for a period of time before rates start to move up aggressively – which we are not expecting in 2010 and 2011 given the large upcoming supply that will accommodate the influx of visitors we expect in the next two years. To recap, we are expecting 11m and 12.8m visitors, up from 2008 visitor arrivals of 10.1m, on the back of the two new integrated resorts.

Investment thesis: We have an Equal-weight rating on CDLHT given our view that the recovery in RevPAR is already in the price. We estimate that at current levels, CDLHT is trading at a terminal year RevPAR of ~S$220 – compared to the highest RevPAR achieved in 2008 of S$209.