CDL H-Trust – UOBKH

Hospitable Outlook Ahead

Increase in ALOS and rebound in visitor arrivals to soak up additional supply. Singapore’s attractiveness as a standalone tourist destination in the region is gaining traction among tour operators, with additional attractions like the upcoming Universal Studios, Marine Life Park and integrated resorts. Average Length of Stay (ALOS), which has been on the uptrend for the last couple of years, is set to receive a major boost. Although there is concern of over-supply in the market with an expected addition of close to 6,000 rooms in 2010, our analysis shows that an ALOS increase of 0.5 days combined with the strong rebound in visitor volumes (+15% yoy in 2010) are more than sufficient to soak up the additional supply. 

ARR to rebound on sustained high occupancy levels. Although CDL Hospitality Trusts’ (CDREIT) occupancy level was sustained at above 86% in 2H09, average room rate (ARR) continued to remain soft at S$184 (-24.3% yoy) in 2009 in line with the industry. We believe that this is mainly due to the wait and-see approach adopted by the hoteliers to ensure the recovery in the number of visitors was sustained. With the improved macroeconomic climate, we expect the scenario to change in 2010 as hoteliers will start regaining their pricing power amid the high occupancy levels. For 2010, we expect CDREIT’s occupancy to remain in the high 80s and ARR to increase 12-17%. 

Yield-accretive acquisition of five freehold hotels in Australia. CDREIT recently signed an A$175.1m deal to buy five hotels (total 1,139 rooms) in Brisbane and Perth, taking the total number of rooms owned to 3,942. The acquisition is yield-accretive with an attractive guaranteed yield of 7.8%, significantly greater than CDREIT’s FY09 implied property yield of 5.2%. We view the acquisition as a positive move, resulting in higher income stability and better diversification of its assets. 

Maintain BUY and target price of S$2.25 based on our two-stage dividend discount model (required rate of return: 7.7% and terminal growth rate: 2.5%).