CDLHT hotels enjoy strong demand

CDL Hospitality Trusts (CDLHT) achieved a record average occupancy rate of 91.6 per cent for its five Singapore hotels in the third quarter of this year, up 5.5 percentage points from the same year-ago period following strong visitor arrivals growth in Singapore.

Average daily rate rose 23.4 per cent over the same period, while room revenue per available room (RevPAR) for the Singapore properties rose 31.2 per cent year on year to $199 in Q3.

Helped by the improved performance of its Singapore hotels and a $4.3 million contribution from the Australian hotels acquired in Q1 this year, CDLHT’s gross revenue rose 38.4 per cent year on year to $31.6 million in Q3. Net property income swelled 40.9 per cent year on year to $30.16 million. Income available for distribution to stapled-security holders increased 44.6 per cent to $26.9 million but CDLHT is retaining $2.694 million for working capital (to fund refurbishment and other capital expenditure). Income available for distribution to stapled-security holders after deducting the retained sum increased 42.8 per cent to $24.2 million, reflecting distribution per unit of 2.54 cents for Q3. On an annualised basis, this works out to 10.08 cents, translating to an annualised distribution yield of 4.69 per cent based on CDLHT’s closing price of $2.15 as at Oct 28. The counter ended one cent lower at $2.14 yesterday.

CDLHT, which makes distributions semi-annually, will not be making a payout for Q3.

The trust owns five hotels in Singapore – Orchard, Grand Copthorne Waterfront, M, Copthorne King’s and Novotel Clarke Quay – and Orchard Hotel Shopping Arcade. It also owns Rendezvous Hotel Auckland and five hotels in Brisbane and Perth.

For the first nine months of 2010, gross revenue rose 35.6 per cent year-on-year to $88.95 million. Income available for distribution (less income retained for working capital) climbed 32.6 per cent to $65.4 million.

Standard Chartered Bank said in a report yesterday: ‘With gearing of 21 per cent and its entire portfolio of $1.74 billion of assets unencumbered, we think (CDLHT) can make any acquisition highly accretive. Potential acquisitions include Studio M at about $150 million from the sponsor (Millennium & Copthorne Hotels) within the next six months.’

Factoring in acquisitions

• Maintain Outperform with higher target price of S$2.30 (from S$2.04). Visitor arrivals to Singapore crossed the one-millionth mark for the first time in its history in Jul 10. We believe the surge was not just the result of seasonality, but an indication of long-term uptrends in hotel demand in Singapore. Acquisitions appear possible in the near term for CDLHT with the sponsor’s Studio M operating above market occupancy rates. We factor in S$300m worth of acquisitions for 2010-11, lower cost of debt and lower payouts. Our DPU estimates fall by 5% for 2010 before rising 3% for 2011-12. Our DDM target price (discount rate 8.6%) rises accordingly to S$2.30.

Although CDLHT is trading at a premium to its peers, its P/BV has yet to reach the peak of divergence with ART and the FSTREI during its last peak in 2007. Larger than-anticipated acquisitions and stronger-than-anticipated room-rate growth in its upcoming 3Q10 results could provide stock catalysts, we believe.

• 3Q10 results likely to shine. Occupancy at all its Singapore hotels had already surpassed 90% in 3Q10, according to the company, some way above the technically full rate of 85% and above the islandwide average of 89.8% in Jul 10. At these saturated levels, we believe room rates could surprise on the high side.

• Refinancing S$350m. In August, CDLHT paid in advance its S$350m S$-term loan facility with proceeds from an issue of S$260m fixed-rate notes and variable-rate notes from its MTN programme. With the refinancing, all-in cost of debt is expected to go down by 50bp to 3.5%. Also, CDLHT’s Singapore assets which were earlier pledged to the term loan are now fully discharged.

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.

CDLHT eyeing Asia-Pacific hotels, but will give China a miss

CDL Hospitality Trusts (CDLHT), one of the largest hotel owners in Singapore, is looking to acquire hotels in Vietnam, India and Japan, but will avoid China due to an oversupply.

The company also expects that Singapore’s booming tourism sector, lifted by the opening of two new casino resorts, will boost hotel room rates further from an average of $220 a night seen in its second quarter, CEO Vincent Yeo said.

‘Singapore is still our favourite market by far in terms of feasibility and prospects, but we can’t just confine ourselves to Singapore, so we are looking at other countries within Asia-Pacific, for example, Vietnam, India and Japan,’ Mr Yeo said.

He said the company has a potential war chest of about $550 million including cash and its ability to raise debt.

CDLHT, which currently has a gearing, or debt to asset ratio, of 18.6 per cent, said it was comfortable about raising its gearing to up to 40 per cent.

The trust, which owns hotels in Singapore, Australia and New Zealand, is managed by a unit of City Developments, Singapore’s and South-east Asia’s second largest property firm after CapitaLand.

Earlier this year, it bought five hotels in Australia for A$175 million (S$213.3 million) from a company part-owned by French hotel group Accor.

About 80 per cent of CDLHT’s rental income comes from its Singapore properties, but Mr Yeo hopes its foray into overseas markets will lower this to 60-70 per cent in the next five years.

CDLHT does not plan to expand into China due to concerns about the supply of hotels in some cities.

‘Most hotels in Chinese cities are doing very badly right now and there’s been severe over-building… Occupancies are low and rates have fallen as a result, but yet people are still building (hotels),’ Mr Yeo said.

Mr Yeo said the surge in Singapore’s tourists arrival is likely to continue as new projects come onstream, such as a river safari and a high-end motor sports hub.

‘I think we are only in the incipient stages of what we call a change in the structural demand in Singapore. The (casinos) are a catalyst to bigger and brighter things,’ he said.

Despite the positive outlook for Singapore’s tourism sector, several brokerages, like Nomura, have a ‘reduce’ rating on CDLHT, citing a risk of slowing visitor growth in 2011 which may hit hotel vacancy as supply increases.

But Mr Yeo said visitor arrivals, projected to grow at 6.3 per cent a year over the next five years by the government, are likely to exceed supply of hotels. He said income from CDLHT’s own hotels could rise as existing corporate agreements are renewed at higher rates.

Shares of CDLHT closed 1.5 per cent lower on Monday at $1.94, but have risen about 10 per cent so far this year. — Reuters