Category: CDL H-Trust
Hospitality REITs – OCBC
Riding on earnings recovery
Growth projected for tourist arrivals. The Singapore Tourism Board (STB) is projecting 11.5m to 12.5m visitor arrivals to Singapore in 2010, up 18.6% to 28.9% from the 9.7m visitors in 2009. It also projects S$17.5b to S$18.5b in tourism receipts this year – up a whopping 40% to 49% from S$12.4b in receipts last year. Catalysts include the opening of the two Integrated Resorts (IRs), the 2010 Youth Olympic Games, and the recovery in the global economy. The STB has a 2015 target of 17m visitor arrivals and S$30b in tourism receipts.
Riding on earnings recovery. The estimates bolster the earnings recovery theme for hospitality REITs CDL-Hospitality Trusts [CDREIT, NOT RATED] and Ascott Residence Trust (ART). The two REITs saw RevPAR1 declines of roughly 28% and 14.5% respectively in FY09 on subdued individual and corporate travel expenditure. We expect hospitality players to enjoy revenue growth this year on the back of improving occupancy and a stabilization (and potential recovery) in room rates. CDREIT is a more direct beneficiary of the new developments on the local scene due to its shorter stay profile and its larger exposure to Singapore vis-à-vis ART. Both REITs should benefit, in our opinion, from the increased MICE space and the potential draw of the IRs (Las Vegas rents more convention space than any other US city).
Earnings growth from acquisitions. CDREIT took advantage of its low leverage (19.1% as of 31 Dec 2009) and the availability of distressed opportunities to enter the Australian market through the acquisition of five hotels. The properties were acquired at a discount of up to 66% discounts to their current replacement value (including land costs). We see limited debt headroom for ART at its current leverage level (41.2% as of 31 Dec) but believe it may still be able to make accretive acquisitions through a combination of debt and equity. Its manager is also focusing on asset enhancements.
Valuations still compelling. CDREIT and ART are up 302% and 251% from their 2009 lows. Nevertheless, we believe ART’s valuations remain attractive at 0.92x book. Depending on the trajectory of the hospitality recovery, there could be room for further upwards earnings revisions (we are currently below consensus). CDREIT and ART are trading at 6% and 6.4% FY10F yields respectively (based on consensus for CDREIT). We do not have a rating on CDREIT. Maintain BUY with S$1.38 fair value for ART, one of our top picks for the S-REIT sector.
CDL H-Trust – DBS
Like bees to honey
• Share price weakness not justified for improved portfolio stability post Australian acquisition
• Singapore tourist arrivals projected to increase 20-30% to 11.5 – 12.5m points to robust growth in 2010
• Offers best leverage to burgeoning Singapore hospitality sector, BUY TP S$2.11 based on DDM
Australian acquisition improves earnings stability. CDL HT’s share price has declined 8% vs the S-REIT index (+2%) since the announcement of its Australian portfolio acquisition in Jan’10. We believe that the current share price does not reflect the added stability of the portfolio given its (i) low beta proxy into Australia with its high minimum base rent of A$13.7m p.a secured over 11.3 years, and (ii) higher downside protection – DPU of 4 Scts per share (vs 2.5 Scts previously) backed by the trust’s base rent component. In addition, we see limited downside to earnings as we estimate that a depreciation of 10% in the AUD-SGD exchange rate will result in a 1% decline in distribution.
Best leverage to growth in Singapore’s tourism sector. CDL HT’s exposure into Singapore hospitality sector has not been diluted. The group will continue to benefit from the expected robust growth in visitor arrivals in 2010 given STB’s projection of between 20-30% growth, translating to demand of 10.9 to 11.9m room nights which represents 83-89% of total available room supply.
Opening of Universal Studios on 18th March 2010 to open tourist floodgates. With confirmation of the opening date, we believe that we will start to see visits to Universal studios flow through to strong headline visitor growth numbers from March 2010 onwards.
Fundamentals sound, maintain BUY, TP S2.11. The current share price weakness is an attractive entry point for investors to gain leverage into the stock. CDL HT offers one of the strongest FY09-11F DPU CAGR of c12.0%. Our BUY call and TP of S$2.11 is maintained offering a total return of 35%.
CDL H-Trust – UOBKH
Hospitable Outlook Ahead
Increase in ALOS and rebound in visitor arrivals to soak up additional supply. Singapore’s attractiveness as a standalone tourist destination in the region is gaining traction among tour operators, with additional attractions like the upcoming Universal Studios, Marine Life Park and integrated resorts. Average Length of Stay (ALOS), which has been on the uptrend for the last couple of years, is set to receive a major boost. Although there is concern of over-supply in the market with an expected addition of close to 6,000 rooms in 2010, our analysis shows that an ALOS increase of 0.5 days combined with the strong rebound in visitor volumes (+15% yoy in 2010) are more than sufficient to soak up the additional supply.
ARR to rebound on sustained high occupancy levels. Although CDL Hospitality Trusts’ (CDREIT) occupancy level was sustained at above 86% in 2H09, average room rate (ARR) continued to remain soft at S$184 (-24.3% yoy) in 2009 in line with the industry. We believe that this is mainly due to the wait and-see approach adopted by the hoteliers to ensure the recovery in the number of visitors was sustained. With the improved macroeconomic climate, we expect the scenario to change in 2010 as hoteliers will start regaining their pricing power amid the high occupancy levels. For 2010, we expect CDREIT’s occupancy to remain in the high 80s and ARR to increase 12-17%.
Yield-accretive acquisition of five freehold hotels in Australia. CDREIT recently signed an A$175.1m deal to buy five hotels (total 1,139 rooms) in Brisbane and Perth, taking the total number of rooms owned to 3,942. The acquisition is yield-accretive with an attractive guaranteed yield of 7.8%, significantly greater than CDREIT’s FY09 implied property yield of 5.2%. We view the acquisition as a positive move, resulting in higher income stability and better diversification of its assets.
Maintain BUY and 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%).
CDL H-Trust – Phillip
Acquisition
• Buys 5 hospitality properties in Australia at a purchase consideration of A$175 m
• Fixed rent portion from properties more than 90%, providing more stability to overall portfolio
• Gearing increases approximately to 30.0%
• Maintain hold recommendation, fair value raised to $1.96
Acquisition
CDL HT announced that it has entered into sales and purchase agreements to purchase 5 hospitality properties located in Australia for a purchase consideration of A$175 million (S$220.9 million). The purchase price is 8% below the market valuation of A$190.4 million. The properties come with a relatively long term lease agreement which expires in 2012 and rental comprises of a fixed component and a variable component. The lessee will pay an annual fixed rent of A$13.7 million and 10% of excess net operating profit. The fixed rent portion is approximately 93% of total rent.
With the addition of the Australia properties, the portfolio now consists of 80% Singapore properties, 14% Australia properties and 6% New Zealand properties. Revenue contribution from Singapore will decrease from 90% to 79%, New Zealand revenue will decrease from 10% to 8% while Australia will contribute 13% to total revenue.
The properties are acquired at a net property yield of 8.4%, which will bring accretion to the portfolio pre-acquisition net property yield of 5.4%. The properties are purchased at a cost of A$153,600 per key, in contrast to the replacement cost estimated by CBRE and Davis Langdon Australia Pty Ltd of A$376,000 – A$449,000 per key. The properties have achieved an average occupancy of more than 80% from 2007 to 2009. Average RevPAR for the properties in 2009 was A$116.
Funding
The acquisition is to be wholly debt funded through an equal weightage of AUD loan and SGD loan. The loan is funded by a multi-currency bridging facility that has a maturity period of one year. We estimate total loans will increase to $524.6 million. Gearing post acquisition will rise to 30%.
Financial Impact
With the contribution from Australia, the portfolio income stream is strengthened, as the minimum rent income will increase from 50% to approximately 56%. The addition also diversifies the geographical concentration. We think that CDL HT has made a good acquisition, considering the stability it brings to the overall portfolio and the attractive valuations of the properties. The initial portfolio has almost 90% of revenue contribution from Singapore and there is a lot of optimism built into Singapore tourism industry. The revenue stream from Australia will buffer the impact if the optimism fails to materialize. We add in the contribution to our projections, which, gives us a revenue growth for FY10E of 29.3%. Our adjusted DPU forecast for FY10E is 9.9 cents, up from our initial forecast of 9.02 cents. We raised our fair value to $1.96 and maintain a hold recommendation.