More than you can imagine

• Stunning 38% yoy spike in RevPAR for April 2010 paves the way for a robust 2Q10

• Acquisitions offer upside to earnings, potentially add 13 Scts to our target price.

• Maintain BUY, TP revised to S$2.20

A steady start to FY10. 1Q results were in line. Improved portfolio-wide performance, plus partial contribution from its newly acquired Australian portfolio lifted gross revenue by 18% y-o-y (1% q-o-q) to S$26.6m. 1Q RevPAR grew to S$174 (+16% yoy, 9% qoq). Income available for distribution came in at S$19.4m (DPU of 2.58 Scts), before retained income for working cap purposes.

April’s RevPAR spikes 38% yoy. 2Q10 is set to deliver even stronger earnings with RevPAR reported up 38% yoy in April’10, even as the industry faces new room supply from the 2 integrated resorts. We note that increase in room demand in Singapore continues to outpace supply. Come 2011, room supply remains tight with only 500 rooms (+1% of room supply) completing. Anticipating higher occupancies and room rates in 2011, we raised FY11 numbers by 2%.

Acquisitions could add up to 13 Scts to our target price. CDL HT trades at an implied yield of 5%, which allows it to acquire assets accretively. The manager remains on a lookout for acquisition opportunities, even in Singapore. Assuming a long-term gearing ratio of 40% (vs 30% currently), we estimate an accretion of S$113m or 13 Scts to our target price.

BUY, TP adjusted to S$2.20. We believe that we are at the beginning of a multi-year secular recovery in the local tourism sector. Execution on its acquisition growth engine could yield an additional 13 Scts to our target price.

1QFY10 Results

• 1Q10 revenue of $26.6 million, net property income of $24.7 million, distributable income of $21.6 million

• 1Q10 DPU OF 2.32 cents

• Maintain Hold, fair value of $1.96

Strong growth

CDL HT continued to register strong growth in 1Q10. It recorded 1Q10 revenue of $26.6 million (+18.1% y-y, +1.7% q-q), net property income of $24.7 million (+20.3% y-y, -0.1% q-q) and distributable income of $21.6 million (+18.9% y-y, -0.3% q-q). The trust retained $2.16 million from the distributable income and 1Q10 DPU was 2.32 cents (+17.8% y-y, -13.1% qq). Occupancy for the Singapore hotels was 84.3%, an improvement of almost 10% points from 1Q09. The q-q drop in occupancy can be attributed to the seasonal factor of the tourism sector as the peak season tends to be in the later half of the year. However we are also concern that the drop may be due to increased competition from the new supply of hotel rooms. RevPar improved 16% to $174, the highest over the last five quarters. Besides improvements in the hotel growth drivers, contributions from the recently acquired five Australia hotels accounted for approximately half of the y-y growth in revenue. Even the retail space that CDL HT owns is showing signs of a turnaround. Occupancy for the Orchard Hotel Shopping Arcade was flat at 81.5%, however average monthly rent increased 4% from $7.35 to $7.64 per month. Revenue contributions from Singapore, New Zealand and Australia are 84.5%, 8.1% and 7.4% respectively.

CDL HT has total debt of $546.3 million with gearing at 30.9%. $234.3 million is due in 2011.

The results of CDL HT reflect the improving tourism sector. The Singapore Tourism Board has a forecast of 11.5-12.5 million tourist arrivals for 2010, a 19-29% increase over 2009. In the first 3 months of 2010, tourist arrivals showed double-digit % growth. Hotel room occupancy held up well above the 80% mark. RevPar showed positive y-y growth for the, a vast improvement over the whole of 2009 whereby every month showed a y-y drop. With the infrastructure in placed and the line-up of events, we are optimistic that the official forecast should not be hard to achieve, barring external shocks.

CDL HT occupancy and RevPar compare well against the industry average. CDL HT occupancy of 84% is in-line with the industry average of 83% and RevPar is 6.1% above industry average of $164. As mentioned earlier, we are slightly wary of the competition from the new supply of hotel rooms. As we take a closer scrutiny on the tourist arrivals number, 1Q10 registered 2.693 million visitors, a slight increase over 4Q09 arrivals of 2.646 million, however CDL HT occupancy dropped 4.5% from 88.9% in 4Q09 to 84.3% in 1Q10. We are keeping our Hold recommendation and fair value of $1.96.

CDLHT Q1 net income rises 20% to $24.7m

CDL Hospitality Trusts (CDLHT) posted improved results for the first quarter ended March 31 on the back of higher room rates, occupancies and contributions from recently acquired hotels.

‘We remain optimistic about the continued growth for hospitality demand, driven by a rebound in business travel and the revitalisation of Singapore’s tourism and retail landscape,’ said CEO of M&C Reit Management, Vincent Yeo.

CDLHT raked in net property income of $24.7 million in Q1, up 20 per cent from a year ago. Contributions from five hotels it bought in Australia in January boosted earnings. In Singapore, there was also a 15.8 per cent increase in room revenue per available room (RevPAR) – to $174, from $150.

In line with the economic recovery, demand for hotel rooms was very strong, Mr Yeo said. ‘High occupancies of 84 per cent were achieved, considerably exceeding that for Q1 2009 and matching previous Q1 peaks since the inception of CDLHT.’ The average occupancy rate in Q1 2009 was about 75 per cent.

He added that the average daily rate rebounded year-on-year for the first time since Q2 2008. It was $207 in Q1, 3 per cent more than the $201 a year ago.

As net property income grew, so did income available for distribution. The latter was $19.4 million in Q1, which is 18 per cent higher than in the same period last year.

Income available for distribution per stapled security in Q1 – after deducting income retained for working capital – was 2.32 cents, up 18 per cent from 1.97 cents year-on-year.

On an annualised basis, the latest Q1 figure is 9.41 cents. Based on CDLHT’s closing unit price of $1.90 on Thursday, this works out to an annualised distribution yield of 4.95 per cent.

The counter gained three cents to end trading at $1.93 yesterday.

CDLHT said that its strong performance in Q1 has continued into Q2 – the RevPAR for its hotels in Singapore have grown around 38 per cent in April. It also expects average room rates to continue registering healthy increases compared with last year.

It is counting on the opening of more attractions to draw more visitors. For instance, more areas at Resorts World Sentosa will be operational in the later part of this year and in 2011.

As at March 31, CDLHT’s debt-to-asset ratio was 30.9 per cent, much higher than the 19.1 per cent three months ago.

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%).