CDL H-Trust – RBS

There is still room for growth

Potential NAV accretion from acquisitions or asset sales could be catalysts for the stock in the near- to mid-term. In addition, CDREIT’s portfolio of business hotels may benefit from a ramp up in the number of conventions held at MBS next year. We raise earnings estimates on lower debt costs. Reiterate Buy.

Corporate hotels to see brisk business next year

We expect CDREIT’s corporate hotels to benefit from a higher volume of convention events held at Marina Bay Sands (MBS) next year. Conventions typically take 12 months to plan and MBS just opened its doors in April this year. This is positive for CDREIT, as 70% of its earnings are derived from business travellers. Its corporate business is generally more profitable than its leisure business, with rates being 30% higher. Management expects the average hotel occupancy rate in Singapore to be around 90-95% in 3Q10 vs 85% in 1H10. We believe this will lead to accelerated growth in the average hotel room rate; in 1H10, this rate was still 22% below the peak of S$248/night in 1H08.

We raise earnings on lower debt costs

CDREIT refinanced its S$260m debt at an all-in cost of 2.3% in August, representing a 130bp reduction to that of its previous SGD debt. This brings its weighted average interest cost to 3.4% (-70bp) for FY11. Thirty percent of CDREIT’s debt is denominated in AUD at a debt cost of 6% following its acquisition of five hotels in Australia in February. We estimate DPU will improve by 1.6% in FY11 and 1.4% in FY12 following the refinancing.

Potential conversion of hotels into residential projects?

CDREIT’s portfolio of five Singapore hotels are well located in prime locations. Given buoyant residential prices and the increasing popularity of city living, we believe CDREIT could convert one or more of its assets into residential projects. Its Singapore hotels were valued at S$640psf as of end-2009 vs a residential land cost of S$1,000psf. However, regulations do prevent REITs from undertaking residential developments, so we believe any conversion would require an outright sale.

We raise our target price to S$2.29

We reiterate our Buy rating and increase our DCF-based target price to S$2.29 (from S$2.24) on lower debt costs. Share price catalysts include: 1) possible future acquisitions, especially in Singapore; and 2) potential NAV accretion from any conversion of its hotels into residential projects. We estimate CDREIT offers yields of 5.2% in FY10 and 6.4% in FY11F.