High-end hotels outperform in Jan

• Good visitor arrivals for Jan

• High-end hotels outperform

• CDLHT in right sub-sector

Visitors arrivals on track

Visitor arrivals maintained strong growth of 13.4% YoY in Jan 2012 to reach 1.2m. In that month, arrivals from the three largest countries of origin, namely Indonesia, China and Malaysia, saw solid increases. These countries accounted for 40% of all visitor arrivals last year. Notably, arrivals from China spiked up 52.8% YoY to 201.7k in Jan. While some of the increase could be attributed to Chinese New Year falling in Jan instead of Feb this year, we note that the Jan-12 China number is 34.5% higher than the Feb-11 figure.

High-end hotels outperform in RevPAR, occupancy

According to the STB, average RevPAR for Singapore hotels increased 11.7% YoY to S$209 in Jan. On a RevPAR basis, high-end hotels outperformed budget hotels. The Luxury and Upscale tiers increased by 9.1% and 14.3% respectively while Mid-tier and Economy hotels saw declines of 6.4% and 3.6%. These results support our preference for the high-end hotel sector. The decline in RevPAR for budget hotels comes not from declining average room rates, which actually increased, but from reduced occupancy (down 7 ppt). Many of the visitors from developing countries are not budget travelers.

CDLHT has good positioning

As mentioned previously, we project that the supply of high-end hotel rooms will increase by 3.0% p.a. for 2012-2015 while budget hotel rooms will increase by 5.6% p.a. We estimate that hotel demand will grow by 6.4% p.a., outstripping total hotel room supply growth of 3.8% p.a. On another related note, CBRE has projected that RevPAR for Singapore hotels will increase by 5%-8% in 2012. Given this, our RevPAR growth projection for CDLHT Singapore’s hotels of 5.5% in 2012 is not aggressive.

Maintain BUY

We maintain our BUY rating and our S$2.00 fair value estimate based on a RNAV analysis. With the majority of its revenue coming from high-end Singapore hotels, CDLHT will continue to be a beneficiary of the blossoming tourism industry.

DEVELOPMENT CHARGE HIKE FAVORS INCUMBENTS

•Rise in DC greatest for hotels

•Possible pipeline from CDL unaffected

•Buoyant hotel demand

Biggest DC hikes for hotels

The development charge (DC) rates announced on last week saw an average increase of 15% for Hotels. We think this is worth mentioning as the next largest average increase was only 6% (Commercial), all other groups saw no changes, except for the 3% decrease for nonlanded Residential. The DC rate hike rates could have incremental impact on future hotel supply by increasing development costs. As an incumbent with 2.7k rooms in six high-end hotels in Singapore, including Orchard Hotel and Grand Copthorne Waterfront, CDLHT has an edge over potential entrants. The significant DC increase has marginally driven up the replacement cost of hotel rooms and thus would have a positive valuation effect on hotels and also on CDLHT.

Possible pipeline from parent CDL

As we have identified in our previous report, there are three hotels being developed by City Developments Ltd (CDL) which CDLHT could consider acquiring. These hotels should be opening over 2012 to 2015 and are not subject to the new DC increases. Through this, CDLHT has some cost advantage over other hotel companies which do not have a developer parent or associate that has already gotten provisional permission for the development of new hotels.

Hotel demand will outstrip supply

We are positive on the long-term prospects of the hospitality sector and believe that this year will set a new visitor arrival record over last year’s stellar 13.2m (up 13%). We project that hotel room demand will grow at 6.4% p.a. for 2012-2015, easily outpacing an estimated increase in hotel rooms of 3.8% p.a. In terms of supply dynamics, high-end hotels (4-star and above) are well-placed with an estimated increase of only 3.0% p.a. over the same period.

Maintain BUY

We maintain our BUY rating and our S$2.00 fair value estimate based on a Revalued Net Asset Value (RNAV) analysis. As a liquid counter with an existing supply of high-end hotels, and a developer parent with a potential pipeline unaffected by the new DC hike, CDLHT is well-placed to benefit from the still-growing tourism industry.

RIDING MULTIYEAR HOTEL INDUSTRY GROWTH

•Hotel demand will outstrip supply

•REIT structure, leases & AEI

•Debt headroom for acquisitions

Strong demand growth for 2012-2015

Given that ~80% of CDLHT’s revenues come from Singapore, its key driver will be the performance of the local hotel industry. The hospitality sector is actively supported by the government and the STB has a target of 17m annual visitor arrivals by 2015, up from 13.2m in 2011. We believe that hotel room demand will grow at a CAGR of 6.4%, outstripping overall supply increases (CAGR: 3.8%) for 2012-2015. Specifically, the high-end hotel subsector, which CDLHT is in, will fare better with a room supply CAGR of 3.0% versus 5.6% for budget hotels. As a liquid high-end local hotel play, CDLHT offers a fairly unique way to capitalise on the multiyear growth of the local hotel industry.

REIT structure and dividend policy

CDLHT consists of a REIT and a dormant business trust. The REIT has master leases on its four- and five-star hotels, with minimum rents for all contracts. The Singapore hotel leases grant CDLHT 20-30% of revenue and gross operating profit as rent. The trust has guided that dividend payout ratio will be in the low 90 percentile range this year to help fund upgrades to the chiller/heater systems and ballroom in Novotel Clarke Quay, with a view to enhancing operating margin and asset value. Asset enhancement initiatives for last year consisted of the refurbishment of rooms in Orchard Hotel and Novotel Clarke Quay.

Debt headroom to pursue acquisitions

We are comforted by the high interest coverage of 8.9x for FY11 and the fact that no debt is due this year. With a gross gearing of 25.2%, there is ~S$520m in debt headroom to finance yield-accretive acquisitions. Going by its track record, the management will likely make prudent acquisitions that will serve as price catalysts.

Initiate with a BUY

We initiate with a BUY rating and a S$2.00 fair value estimate based on a Revalued Net Asset Value (RNAV) analysis. CDLHT represents a solid way to capitalise on the continued robust growth in tourism, while its REIT structure provides the comfort of consistent dividends.

Going strong

With more attractions and events lined up, we share management’s optimism on the local hospitality industry during its briefing. We also like management’s selective and value-driven approach towards acquisitions. CDLHT remains ourtop pick among the S-REITs.

We raise DPUs by 1% on higher REVPARs, offset partially by lower payouts. Backed by conservative book valuations, valuations are not excessive at 1.1x P/BV vs. a long-term average of 1.3x. Maintain OP. We see catalysts from stronger REVPARs and accretive acquisitions.

What Happened

An upbeat management shared its observations and views on the local hospitality industry. Backed by sustained demand from corporates and tight occupancy, management guides that the industry has been able to increase corporate renewal rates by an average of 5%. While upcoming room supplies may pose competition, the deferment of some projects could take some of the heat off. Meanwhile, management remains highly selective and value-driven towards acquisitions. It believes that local transacted values of S$900k per room are excessive and does not see reason to partake given the pipeline from its sponsor. Payouts should be at the low end of 90+% and will continue to match retained earnings against maintenance capex needs to improve efficiency and margins.

What We Think

Backed by events and tourist attractions, resilient Asian economies and moderate upcoming room supplies, the outlook for hospitality remains positive. We continue to like management for its prudence while a strong balance sheet (asset leverage of 25.3%) provides debt headroom for acquisitions and AEI (e.g.Orchard Hotel Shopping Arcade after the finalisation of plans).

What You Should Do

While the stock has been re-rated16% since our last note in Dec 11, we continue to see value at 1.1x P/BV vs. its long-term average of 1.3x. Book valuations of about S$600k per room key for its local properties remain highly conservative when benchmarked against theS$900k per room key (implied cap rate of <5%) in some market transactions. Maintain Outperform.

CDLHT’s DPU rises 5.8% in fourth quarter

Its S’pore hotels, excluding Studio M, post Q4 RevPAR of $205, up 6%

CDL Hospitality Trusts (CDLHT), which has posted a 5.8 per cent year-on-year rise in distribution per stapled security for Q4 2011, continues to look for acquisition targets in Asia Pacific markets.

‘Singapore still remains our favourite market in terms of visibility and prospects,’ said Vincent Yeo, CEO of M&C Reit Management, the manager of CDLHT, at a media briefing yesterday.

The stapled group posted distribution per stapled security of 2.94 cents for Q4 2011, up 5.8 per cent from the same year-ago period. Over the same period, CDLHT’s gross revenue rose 13.4 per cent to $37.8 million – thanks to improved hospitality performance across the portfolio and contribution from Studio M Hotel in Singapore, which was acquired in May last year

Net property income for Q4 improved 12.7 per cent year-on-year to $35.5 million.

The stapled group, which makes semi-annual payouts, will distribute 5.71 cents per stapled security for the July 1-Dec 31, 2011 period, or 7.5 per cent higher than the same year-ago period. The payout for H2 2011 will comprise 5.33 cents of taxable income and 0.38 cent tax-exempt income. The counter ended 6.5 cents higher at $1.775 yesterday.

The group’s Singapore hotels achieved strong performance for Q4 as well as full-year 2011. Fuelled by the growth in visitor arrivals, revenue per available room (RevPAR) of the hotels here, excluding Studio M, rose 6 per cent year-on-year to $205 in Q4 2011, the highest Q4 RevPAR since CDLHT’s inception in 2006, supported by high average occupancy of 88.6 per cent in the quarter. Including Studio M, the RevPAR for the Singapore hotels increased 6.1 per cent to $200 in Q4 2011.

Full year 2011, the Singapore hotels’ RevPAR (excluding Studio M) climbed 6.9 per cent to $204, just a tad below the all-time high annual RevPAR of $207 achieved in 2008.

This was despite an increase in hotel room supply in Singapore and room nights being taken out of Orchard Hotel’s inventory during the year for refurbishment. Excluding Orchard Hotel, the RevPAR growth would have been higher at 10.2 per cent in FY 2011 compared to a year ago.

The group’s five Australian hotels – in Brisbane and Perth – also continued to perform strongly, bolstered by the buoyant natural resource sector and static supply of hotel rooms.

Full-year 2011 gross revenue rose 15.4 per cent to $141.1 million. Net property income improved 17.5 per cent to $135.2 million. Distribution per stapled security climbed 8.3 per cent to 11.05 cents.

Last year, the group finished refurbishing the 331-room Claymore Wing of Orchard Hotel. By mid-January 2012, it also completed upgrading all the rooms at Novotel Clarke Quay. Asset-enhancement initiatives this year are likely to focus on less ‘visible’ back-of-house works like chiller replacements to boost hotel efficiencies and create energy savings, says Mr Yeo.

Last year, CDLHT retained 10 per cent of its income available for distribution as working capital to fund capex on asset enhancement initiatives, resulting in a payout ratio of 90 per cent. A ‘good guide’ on 2012’s payout ratio is the low-90s, says Mr Yeo.

M&C Reit Management acknowledged that the outcome of the European debt crisis, the depth of the recession in some European countries and the health of the US economy may have an impact on Asian economies which may affect visitor arrivals and the hospitality sector.

‘There are indications in the market that some companies are exercising caution about travel budgets in view of the economic uncertainty,’ it added.

On the flip side, the range of new attractions in Singapore – including the first phase of the Gardens by the Bay and the River Safari – as well as the stronger events calendar in 2012 could continue to draw visitors to Singapore, it added.