Adding 1,139 keys to portfolio

• Acquiring an Australian portfolio at a total cost of A$187.2m (or A$154k per key)
• Initial yield of 7.9% attractive vs implied 5% yield
• Reiterate BUY, TP adjusted to S$2.11, offering total return of 27%

Growing keys by 1,139. CDL Hospitality Trust (CDL HT) announces the acquisition of a portfolio of 5 freehold Australian hotels comprising 1,138 rooms for A$187.2m (S$154k per room). The portfolio will be operated by Accor SA for a period of 11.3 years on a base + variable rent structure, offering strong and steady incremental growth. The base rent is well protected by strong underlying cashflows – rent payable is 60% of the underlying EBITDA of the portfolio.

Accretive at 7.9%. The deal is accretive as the initial yield of the properties is 7.9% and compares favorably to the implied trading yield of 5%. When completed, CDL HT’s total portfolio value will increase by 15.7% to S$1.7bn. The deal is expected to be 100% funded by debt at an assumed all-in-cost of 4%. DPU is expected to spike up 6-9% to 11.4 Scts (FY10F) and 12.2 Scts (FY11F).

Maintain BUY, TP $2.11. We remain positive on this development given the strong accretion to earnings and high-income protection that the acquisition offers to the trust. Based on our estimates, the fixed income portion of the trust will increase to c4.0Scts per unit (assuming nil variable income), limiting downside to earnings. Maintain BUY

Down Under acquisition

Acquires Australian portfolio for S$221m

Upgrade to Outperform from Underperform; target price raised to S$2.01 (from S$1.68). The manager of CDLHT has announced the acquisition of five Australian hotels for a purchase consideration of S$221m (A$175m) from Tourism Asset Holding. To be fully funded with debt, the portfolio will be leased and managed by The Accor Group at a net property yield of 8.4%. Our DPU estimates rise by 5-10% for FY10-12 after accounting for this acquisition. Accordingly, our DDM target price rises to S$2.01 (discount rate 8.7%) from S$1.68. CDLHT offers a prospected total return of 21% from a forward yield of 6.4% and projected price upside of 14%. We believe this is a convincing acquisition with potentially strong accretion to distributable income, good REVPAR upside, and a reliable tenant-cum-operator. We are impressed with the
manager’s ability to acquire at distress pricing and believe there could be more acquisitions this year. Upgrade to Outperform from Underperform.

Hotels in Brisbane and Perth CBDs. The purchase consists of three Brisbane and two Perth hotels: Novotel Brisbane, Mercure Brisbane, Ibis Brisbane, Mercure Perth and Ibis Perth. The five freehold properties have 1,139 rooms in total. They are 3.5- to 4.5-star hotels located in the Central Business Districts of both cities, well positioned to capture both business and leisure travellers. At a purchase price of A$175m (S$220.9m), price per key is about A$154,000, or a 66% discount to replacement cost.

Master lessee structure; operated by Accor. The portfolio will be leased and operated on a master lease structure by The Accor Group, an international hotel operator which operates about 4,000 hotels in 92 cities with over 470,000 rooms. The lease period is long at 11.3 years, expiring in 2021. Additionally, the lessee’s obligations are guaranteed by Accor SA, a BBB-rated entity by Standard & Poor’s, for the entire duration of the leases.

7.8% yields guaranteed. The rent to be paid to CDLHT consists of a guaranteed base rent of A$13.7m, and a variable component that is 10% of net operating profit in excess of the base rent. Based on FY09 revenue, the variable component is estimated at A$1m. This gives CDLHT an expected annual rental yield of 8.4%, of which the guaranteed base rental yield is 7.8%. Under a triple net lease arrangement, the lessee will bear property tax, insurance and maintenance costs. Tax leakage from Australian net income is estimated at 3%.

Hotel demand in Brisbane and Perth underpinned by tourism and infrastructure growth. Hotel demand in Brisbane and Perth looks set to grow over the medium term. In Brisbane, growth should be underpinned by limited room supply, a thriving tourism sector, a strong resource sector, and the government’s commitment to infrastructure spending. Fundamentals are equally strong in Perth. As the business hub for Western Australia, and a key global supplier of iron ore, crude oil and LNG, Perth’s hospitality sector is set to benefit from large private and public infrastructure spending which will include the A$43bn Gorgon project, one of the largest resource projects in Australia expected to create up to 10,000 jobs when construction starts in 2010. Projected REVPAR growth is 5% for Brisbane and 3.6% for Perth, below the annual REVPAR CAGRs of 8% (Brisbane) and 13.5% (Perth) respectively.

Fixed rent component of portfolio rises to 56% from 50%. In our opinion, the risk profile of CDLHT is still stable, as the addition of its Australian portfolio would increase the fixed rent component of CDLHT to 56% from 50%.

Funding 100% with debt, asset leverage rises to 30%. Management intends to fund the acquisition with debt, which would be 50% in A$ and 50% in S$. The REIT has in place a short-term multi-currency acquisition facility to complete this acquisition. Blended cost of debt for this facility is estimated at 5%. However, management expects to replace this with a longer-term and lower-cost facility in 2010. Options include an MTN programme put in place earlier, and convertible bonds. With this acquisition, asset leverage for CDLHT will rise from 19% to about 30%, way below the regulatory limit of 60% and still comfortable.

Valuation and recommendation

Strong underlying cash flows. We believe that the tenant Accor will be able to support rent to CDLHT given that the portfolio is supported by strong operating cash flows: EBITDA after furniture fixtures and equipment (FF&E) yield is 13.8%, significantly higher than the 8.4% projected rental yield accruing to CDLHT. Furthermore, rents to CDLHT make up 60% of the tenant’s EBITDA after deducting operator fees and provisions for FF&E.

Upgrade to Outperform from Underperform; target price raised to S$2.01 (from S$1.68). After accounting for this acquisition, our DPU estimates rise by 5-10% for FY10-12. Our DDM-derived target price rises to S$2.01 from S$1.68 (discount rate 8.7%). CDLHT offers a prospected total return of 21% from a forward yield of 6.4% and projected price upside of 14%. We believe this is a convincing acquisition with strong accretion to distributable income, good REVPAR upside, and a reliable tenantcum- operator. We are impressed with the manager’s ability to acquire at distress pricing and believe there could be more acquisitions this year. Upgrade to Outperform from Underperform.

Paying more for your rooms

• RevPAR continues to trend upwards
• CDL HT sees firm occupancies in 1Q10 despite competition from Resorts World hotels
• Maintain BUY, TP S$2.00 based on DDM

A good quarter. In a traditionally weak 4Q, CDL HT reported commendable S$26.1m revenue (-7% yoy, 14% qoq) and NPI of S$24.7m (+1.1% yoy, 16% qoq), in line with our estimates. CDL HT’s hotels continued to perform well, with RevPAR growing steadily to S$159 per room night, up 3% qoq but remained below last year’s rates. Sustained high average occupancies of 89% also signal the possibility of rate hikes come 2010. 4Q09 DPU of 2.67 Scts was slightly ahead as CDL HT reverted to 100% payout of taxable income.

Firm occupancy rates despite competition from Resorts World. Recent news that hotels at Resorts World Sentosa (RWS) are fully booked till Mar’10 is positive for the local hotel industry. Average room rates for RWS hotels are S$282-422 per roomnight, well above industry average of S$200 per room-night also allay earlier fears of RWS slashing rates to boost occupancies. CDL HT guided that they did not see any drop in occupancies from current levels and could hike rates up in 1Q10. We also expect its strategically located hotels to enjoy spillover demand for rooms when RWS is fully operational.

Fundamentals remain sound, maintain BUY, TP S$2.00. We maintain our BUY call on CDL HT as we firmly believe that it will be a key beneficiary of an increasingly buoyant tourism outlook. Our DDM-based TP is adjusted to S$2.00 due to our raised payout assumptions. Catalysts for further re-rating stems on potential acquisitions given the trust’s low gearing ratio.

CDLHT posts 88.9% average occupancy

But weaker room rates drag down RevPAR by 13.6% to $159 in Q4’09

CDL Hospitality Trusts (CDLHT), a favourite stockmarket proxy for the improving outlook for Singapore’s tourism sector, achieved an average occupancy rate of 88.9 per cent for its five Singapore hotels in the fourth quarter last year, a better showing than the fourth quarters of the preceding two years.

‘We’re seeing demand levels back to where they were prior to the economic crisis, albeit room rates are lower,’ said Vincent Yeo, CEO of the trust’s manager.

‘In November 2009, we did the highest occupancy rate ever bar one month (since the inception of our Reit in July 2006),’ he added.

However, weaker room rates dragged down room revenue per available room (RevPAR) by 13.6 per cent to $159 in Q4 2009 from $184 in Q4 2008. RevPAR peaked at $222 in Q2 2008.

The trust posted income available for distribution to unitholders of about $21.7 million for Q4 2009, a 14 per cent improvement from the same year-ago period.

Despite a 7.1 per cent year-on-year (y-o-y) drop in gross revenue to $26.1 million in Q4 2009, CDLHT achieved a 14 per cent y-on-y rise in net property income to $24.7 million. This was due to lower property tax expenses (inclusive of a 40 per cent property tax rebate granted by the Singapore government last year) and lower other property expenses.

The latest Q4 distributable income reflects a distribution per unit (DPU) of 2.58 cents.

For full year ended Dec 31, 2009, CDLHT posted total distributable income of $75.8 million, a decline of 17.6 per cent from the preceding year. The trust is paying out a total of $71.7 million, reflecting a 94.6 per cent payout ratio. It is retaining the balance $4.1 million (which is tax-exempt income) to help fund future capital expenditure on its properties.

CDLHT had $5.7 million in cash and cash equivalents as at end-2009.

CDLHT, which pays distributions semi-annually, will be making a payout of 4.71 cents per unit for the second half of last year. The full-year 2009 payout works out to 8.57 cents, which translates to nearly 5.2 per cent yield based on the counter’s $1.66 closing price yesterday.

The trust, which was listed on the Singapore Exchange in July 2006, 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 a hotel in New Zealand – the Rendezvous Hotel Auckland.

London-listed Millennium & Copthorne Hotels (M&C), as sponsor of CDLHT with a 39.5 per cent stake, has given a right of first refusal to sell its Singapore properties to the trust for a five-year period starting from CDLHT’s listing date in July 2006. M&C will open a new hotel, Studio M, in the Robertson Quay area around April.

M&C’s parent City Developments has a stake in the St Regis Singapore. Overseas, the trust’s acquisition strategy is dependent on where the deals emerge and ‘the markets where we’re seeing the most deals flow are Australia and Japan’, Mr Yeo said.

Singapore’s pool of hotel rooms is expected to increase by about 5,800 rooms or 17 per cent this year. Most of the additional supply will come from the two integrated resorts (IRs).

Achieving even a 0.5-night increase in the average length of visitor stay in Singapore will help to offset a large part of the additional supply in 2010, Mr Yeo argues.

The demand-pull factors in Singapore are escalating to a new plane with the opening of the IRs. With a mix of gaming entertainment, conference facilities and the Universal Studios theme park, ‘the IRs mark a significant step forward in Singapore’s transformation into a world-class travel destination and a preferred mono-travel destination’, the trust manager said.

Mr Yeo said that ‘gaming is somewhat addictive so you could see very frequent visits’ from visitors in neighbouring countries such as Indonesia and Malaysia.

The draw of the IRs should also help to convert some of the transit passengers at Changi Airport to visitor arrivals into Singapore.

‘Less than 7.4 million of a total of 37.2 million passengers passing through Changi Airport in 2009 would have visited Singapore,’ the trust manager noted.

Keep the faith in Integrated Resorts

• Keeping the faith. CDREIT has more than quadrupled since the trough in Mar 09, and has outperformed the FSSTI index by 110.5% in the last 12 months. While volatility for hospitality stocks tends to increase before large events such as the opening of 2 integrated resorts (IRs), we maintain our Overweight rating on CDREIT on the back of J.P. Morgan’s bullish view towards the two IRs.

• Raising our estimates. We raise our earnings estimates for FY10EFY12E by 18% as we increase our room rate forecast and expect the trust to revert to 100% dividend payout ratio. Our revised estimates assumes RevPAR for Singapore hotels at S$191/day and S$210/day for FY10E and FY11E, which compares to the peak RevPAR of S$208/day achieved in 2008.

• Earnings risk still on the upside. Given that no. of rooms per casino table for the 2IRs in Singapore is much lower than that in Malaysia and Macau, we see greater opportunity for hoteliers such as CDREIT to further increase its RevPAR. We estimate that every 10% increase in CDREIT’s RevPAR would increase our DPU estimate by 12%. In addition, the trust could utilize its lowly geared balance sheet for yield accretive acquisitions.

• We reiterate our Overweight rating on CDREIT, and raise our Dec-10 DDM based price target to S$2.00/share (S$1.85/share previously). The increase in PT is a result of an increase in earnings estimates and a reduction in LT growth forecast to 2.3%. Key risks to our rating and price target include a failure for the 2 IRS to attract visitors to Singapore and a worse than expected operating performance.