Backend-loaded contributions

While industry dynamics could weaken, we expect theimpact to be softened by upcoming tourist attractions, stronger Asian visitor arrivals and a refurbished Orchard Hotel. Balance sheet remains strong.We see value after its recent sell-down.

3Q11/9M11 DPU meets consensus and our forecasts, at 24%/70% of FY11. We expect backend-loaded contributions from a refurbished Orchard Hotel. Expecting lower REVPAR and payouts, we cut our DPU and DDM target (discount rate 8.6%). Still, maintain Outperform.

Completion of Orchard Hotel AEI

We expect the completion of upgrading work (mid-Sep 11) at its largest asset, Orchard Hotel, to buffer any softening in business in upcoming quarters. REVPAR for its local hotels expanded 6% yoy to S$211 or its second highest in history. Growth would have been stronger if not for upgrading work at Orchard Hotel, which took away 2,268 room nights (4%/1% of Orchard Hotel/total inventory) and weaker business travel in Aug.

Not expecting a repeat of 2009 yet

We do not expect a repeat of 2009 in
terms of tourist declines just yet with regional economies still expected to grow (albeit slower) and tourist arrivals in past months still fairly unscathed. We are, however, lowering REVPAR assumptions to factor in some slowdown. Management notes continued strong demand in Jul-Sep and attributed the less exuberant quarter to a weaker Aug from the presence of more public holidays this year.

Ammunition from strong balance sheet

We believe CDLHT’s low asset leverage of 26.5% continues to position it for debt-funded acquisition. Management remains prudent in retaining income to fund capex. With increased macro uncertainties, we are reducing distribution payout to 91% in FY12 (same as FY11) from 95%.

Poised to grow on three Fronts

•2Q11 revenue $34.6m, NPI $35.6m, distributable income $28.5m

•2Q11 DPU of 2.96 cents

•Increase revenue by 1.7-1.8% for the period between 2012 and 2015

•Raise target price to S$2.10 but maintain Hold

1H11 DPU was in line with our estimates

Better hospitality performance and contribution from Studio M Hotel boosted gross revenue by 12.6% y-y to $34.6m. NPI was $35.6m, up 24.0% from a year before and exceeded the gross revenue for the reporting quarter. This was attributed to the one-off property tax refund of about $3.3 million and improved top-line. Distributable income after deducting the income retained for working capital was $28.5m (+31.3% y-y) and translated to a DPU of 2.96 cents. Adding together 1Q11 DPU of 2.38 cents, the aggregate dividend payout for 1H11 was 5.34 cents forming 49% of our full year DPU estimate. Average occupancy rate (AOR) for Singapore Hotel was 88.1% in 2Q11, a dip of 0.4%-pt compared with the preceding year. Nevertheless, average daily rate (ADR) edged up 5.5% y-y to $232 and made up for the dip in AOR, and thus lifted the revenue per available room (RevPAR) to $205. AOR for Orchard Hotel Shopping Arcade stayed above 96.5% level with an average monthly rental rate of $7.05 per sq ft. CDL HT’s Australia Hotels continued to perform well supported by the commodity-rich sector and static supply of hotel rooms.

Fueled by three growth engines

1. Organic growth: Singapore tends to receive more visitors in second half of the year due to seasonal factors. Increased demand in hotel rooms may exert upward pressure to ADR. ADR, a laggard, will also play catch up with AOR. Therefore, ADR for Singapore hotels is anticipated to gain traction over the next few quarters. 2. Enhancement growth: Phased refurbishments at Orchard Hotel and Novotel Clarke Quay will give rise to higher ADR when remaining rooms are slated for completion. Enhanced product offerings will raise their standards to remain competitive with other hoteliers along Orchard shopping belt and those in the vicinity of River Valley precinct. 3. Acquisition growth: Ample debt headroom also leaves CDL HT well-positioned for further acquisition trail in the Asian hospitality sector in 2011.

Valuation

Hospitality market performance is highly susceptible to the health of tourism market and external economies, and a change in tide may overshadow the optimism on tourism growth story. Despite 2Q11 result was largely on track to meet our full year estimates, we are mindful to raise our revenue forecast between 2012 and 2015 by 1.7-1.8% as our earlier projection was slightly conservative. Coupled with the property tax refund, we revised our target price to $2.10 but maintain Hold as the valuation is not attractive relative to other REITs which are more resilient and command a lower NAV premium. We opine that the CDL HT’s current price is fairly value.

Riding on the up cycle of hospitality sector

•Tapped on its sponsor’s pipeline of properties – Studio M Hotel.

•Stayed on track to compete with newly-completed and upcoming hotels.

•Downplay the upsides in the tourism market.

•Downgrade recommendation to Hold with revised target price of S$2.04.

Studio M hotel acquisition

CDL HT made a comeback to Singapore hospitality property sector by acquiring Studio M Hotel from its sponsor to ride on the tourism wave. The record high visitor arrivals in 2010 and renewed confidence in Singapore tourism market lent support to the acquisition since the subject property just completed in March 2010. Following the acquisition, Singapore room inventory added 360 room counts to 2,711. The S$154.0 million price tag works out to ~S$428,000 per room less the transaction costs. The purchase was fully debt-funded and therefore it is DPU accretive to the unit holders. Post acquisition, the gearing ratio remains at a healthy level of 26.9% and a debt headroom of ~S$400 million for inorganic growth based on 40% total debt-asset leverage ratio.

Asset enhancement at Orchard Hotel and Novotel Clarke Quay

Ongoing upgrading works are scheduled in phases at the Orchard Hotel (OR, 401 rooms) and will continue until 3Q 2011, while the balance of the works at Novotel Clarke Quay (NCQ, 331 rooms) are slated to commence at the year end. In the long run, the short-term loss of rental income from the refurbishment works will be offset by the additional premium commanded on the refurbished rooms. In our opinion, the new facelift will increase competitiveness of CDL HT’s hotels with the new kids on the block.

Downside risks weigh on the potential upsides

Hospitality sector has always been susceptible to dwindling external economies and tourism performance. Downside risks may creep in and overshadow the buoyant tourism market. Possible interest rate hike at the year end, increased foreign worker levies in phases till July 2013 and rising fuel surcharge in aviation sector may dampen the hotel businesses going forward. On the flip side, the lag effect of ADR on higher AOR will be reflected in 2011. Nevertheless, the pipeline supply from 2011 to 2013 will put a cap on the trajectory growth in room rate.

Valuation

Our DDM model has priced in the property tax revision (25% of gross room receipts) from 2011 onwards for Singapore hotel properties, lower RevPAR for OH and NCQ due to refurbishment as well as revenue contribution from Studio M Hotel. We are still positive on the tourism sector for this year but the aforesaid downside risks and pipeline supply coming on stream in the next few years will keep a lid on rental growth. To account for the downside risks, we raise the cost of equity from 6.3 to 7.6% and derive the target price of S$2.04. We believe the current price reflected the fair value of the stock and therefore downgrade our recommendation to hold.

Tourist arrival booster continues

1Q11 DP U rose 2.6% YoY. CDL Hospitality Trusts (CDLHT) reported DPU of 2.38S¢ (+2.6% YoY; -14.4% QoQ), representing 20% of our FY11 DPU estimate. Stripping out the one-off exchange gain in 1Q10, DPU for 1Q11 grew 23.5% YoY. Gross revenue grew 21.4% YoY in 1Q11 (-3.1% QoQ) mainly due to 1) full three-month contributions from the Australia Hotels acquired in Feb 2010 (vs 41 days of contributions in 1Q10), and higher RevPAR for Singapore Hotels at S$195 (+12.1% YoY; +0.8% QoQ). We expect the acquisition of Studio M Hotel to be completed in May 2011 and this will boost CDLHT’s DPU in subsequent quarters. Maintain BUY and unchanged TP of S$2.46, based on DDM (COE: 8.4%; TGR: 3.0%).

Tourist arrival growth expected to remain strong. The Singapore Tourism Board projects tourist arrival numbers to grow 7.9%/year to 17.0m in 2015. In addition, the recent nuclear crisis in Japan could potentially boost Singapore’s tourist arrival further in FY11. Given the positive outlook, we believe CDLHT will continue to benefit from high occupancy rate as well as rising ARR. AOR and ARR for CDLHT’s Singapore hotels in 1Q11 are 85.7% (+1.7ppt YoY; -4.3ppt QoQ) and S$228 (+10.1% YoY; +6.0% QoQ) respectively.

Studio M hotel acquisition to boost DPU in subsequent quarters. The EGM for the acquisition of Studio M will be held on 29 Apr 2011. Based on assumed debt cost of 3.5% and net property income yield of 6.1%, we estimate the new addition will contribute 0.3-0.4S¢ to FY11-12 DPU respectively.

Post acquisition gearing of 26.9% implies debt headroom of ~S$240m. Based on 1Q11 total asset of S$1.8b and target gearing of 40%, we estimate CDLHT is able to take on another S$240m worth of debt to bolster its cash pile for further acquisitions or AEI following the acquisition of Studio M Hotel which will be fully funded by debt.

CDL Hospitality Trusts posts healthy Q1 results

SURGING visitor arrivals and acquisitions helped boost results for CDL Hospitality Trusts (CDLHT) for the first quarter ended March 31. CDLHT – a stapled group made up of CDL Hospitality Real Estate Investment Trust (H-Reit) and CDL Hospitality Business Trust – saw gross revenue jump 21.4 per cent from a year ago to $32.3 million.

It benefited from improved performance at its hotels in Singapore, and a full quarter’s contributions from hotels in Australia it bought in February last year. Net property income rose 21.8 per cent to $30.1 million. Income available for distribution to holders of stapled securities (after deducting income retained for working capital) was $22.8 million – up 17.4 per cent. From this, income available for distribution per stapled security was 2.38 cents – 2.6 per cent higher.

CDLHT’s hotels in Singapore enjoyed a good first quarter as visitor arrivals continued to grow. The average occupancy rate in Q1 was 85.7 per cent, which not only exceeded last year’s 84.3 per cent, but is also the highest recorded for CDLHT in the first quarter of a financial year. The room revenue per available room in Q1 also rose 12.1 per cent year on year to $195.

CDLHT is optimistic about prospects for hotels here. ‘Upcoming new tourism demand drivers in 2011 should continue to contribute to accommodation demand in Singapore,’ said Vincent Yeo, CEO of H-Reit’s manager.

The counter lost one cent on the stock market yesterday to close at $2.04.