CDL Hospitality Trusts

Key takeaways from company visit

Management reiterates our positive view on the stock. CDREIT is a key beneficiary of the expected recovery in visitor arrivals in Singapore. Maintain BUY with a target price of S$2.25.

Corporate Event

We met the management of CDL Hospitality Trusts (CDREIT) on 8 March. Investor queries were centred on the following: a) occupancy levels and average room rates, b) impact of opening of integrated resorts (IR), c) recent acquisition of Australian portfolio, d) potential acquisitions, and e) buyer profile.

Stock Impact

Occupancy levels to remain close to 90%. CDREIT’s 4Q09 occupancy rate stood at 88.9%, better than the pre-crisis occupancy levels of 2007-08 during the same period. November’s occupancy of 93% is the highest monthly occupancy since CDREIT’s listing in 2006. Management remains upbeat that the high occupancy levels are here to stay and expects demand to remain strong even after the opening of 1,350 rooms at Resorts  World at Sentosa (RWS). We expect CDREIT’s occupancy levels to stay close to 90% in 2010 on the back of a strong recovery in visitor arrivals in  2010 (January visitor arrivals up 17.6% yoy) combined with an increase in ALOS.

Weekend occupancy to be boosted by opening of IRs. CDREIT’s customer base comprises about 70% business travellers and 30% leisure travellers. Its hotels generally enjoy very high occupancy levels of above 85% on weekdays and 75% on weekends. Management expects a strong
pick-up in demand for its hotels from leisure travelers during weekends as Singapore gains traction as a mono tourist destination with the opening of the IRs. CDREIT will also benefit the most from the spillover effects of the strong demand for RWS hotels, with its strategically-located hotels being close to the IRs.
ARR to spike in 2011. Management notes that the increase in ARR has not kept up with the pick-up in occupancy levels as close to 30% of room rents were locked in last year from their corporate clients. Management expects room rents to start picking up in 2H10 with the sustained high occupancy levels. We forecast ARRs to increase 10% in 2010 and 15% in 2011.

Australian acquisition done at near distressed levels. CDREIT recently acquired five hotel properties in Brisbane and Perth for A$175.1m, or A$153,600 per key. The acquisition was done near distressed levels at steep discounts of up to 66% to the current replacement. Management noted the occupancy levels for these hotels have remained above 83% over the last three years despite the economic crisis, and expects RevPAR to improve in the coming years on the back of high occupancy levels, fuelled by economic growth and tight supply of hotels in these regions.

Actively seeking more acquisition opportunities. CDREIT’s net debt-toasset ratio stands at 0.3x with the acquisition of the Australian portfolio.
Management views 0.45x as a comfortable gearing level in the present conditions, giving an additional debt headroom of about S$200m, and is on the active lookout for acquisition opportunities in Australia, Thailand and Japan. In Singapore, management sees the possibility of Studio M and St.Regis hotels, owned by parent City Developments and Millenium & Copthorne Hotels, being injected into its portfolio over the next two years, and South Beach hotel in the long term.

Earnings Revision
We maintain our earnings estimates.

Valuation/Recommendation
Maintain BUY with a 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%).