3Q09 results showing strong recovery

• 3Q09 results better than expected. CDREIT announced 3Q09 results, DPU of S$0.0204/unit, up 8% Q/Q and is 6 % ahead of J.P. Morgan estimates. DPU YTD amounted to S$0.0590/unit, annualizing 5% yield based on Friday’s closing price. Note that the trust currently pays out only 90% of its distributable income and pays dividend on a semi-annual basis. Book value stood at S$1.41/unit with gearing comfortably at 20.2% and interest cover at 10 times.

• Operating statistics showing strong recovery trend. Occupancy rate for the quarter surged to 86.1% versus 75.5% in 2Q09 with average room rate being stable. RevPAR increased 15% to S$154/day in 3Q09, showing strong recovery trend. We note that occupancy rate tends to pick up 2-3 quarters ahead of room rate and we have therefore raised our earnings estimates by 5 – 7% for FY09E – FY11E.

• Earnings risk still on the upside. Visitor arrivals to Singapore has registered its first Y/Y growth in 2009 this September albeit last year’s low base. Given J.P. Morgan’s bullish view on 2 integrated resorts to be opened in 1Q10 and continuous improvement of business travels, we could see potential upside to RevPAR and therefore earnings estimates. In addition, the trust is currently paying out only 90% of its distributable income, a return to 100% payout ratio as fundamental improves could lift our estimates up by another 10%.

• We reiterate our OW rating on CDREIT, and raise our Dec-10 price target to S$1.85/unit, based on our DDM model using 7.7% discount rate and long term growth rate of 2.8%. Key risk to our rating and price target mainly stem from valuation’s high sensitivity to the RevPAR assumptions. We estimate that every 10% change in RevPAR would affect our DPU estimates by 12%. Any events that could adversely affect both corporate and leisure travels such as pandemics influenza would also be one of the key risks.

Recovery Under Way

Impact on our views: We maintain our Equal-weight rating on CDLHT. At current levels, CDLHT offers investors a 4.7-5% dividend yield for FY09e-FY10e compared with 6-6.5% of the other commercial S-REITs under our coverage. The improvement in RevPAR trends is certainly encouraging, and is witnessed across the Singapore market, but we believe expectations of a RevPAR recovery are already in the price.

What’s new: 9M09A Gross revenue and Net property Income was 73% and 74% of our full-year estimates, but Distributable income is already 79% of our estimates due mainly to the addback of an exchange loss to distributable income that we did not account for. RevPAR continues to improve on a quarterly and year-on-year basis with QoQ +15% (2Q09: -11%) and YoY –28% (2Q09: -40%). The main driver of RevPAR growth in 3Q09 was an improvement in occupancy to 86.1%, up 10.6ppt from 2Q09. Rates have stayed stable at 179 from 178 in 2Q09, which supports our thesis that occupancy has to remain high for a period of time before rates start to move up aggressively – which we are not expecting in 2010 and 2011 given the large upcoming supply that will accommodate the influx of visitors we expect in the next two years. To recap, we are expecting 11m and 12.8m visitors, up from 2008 visitor arrivals of 10.1m, on the back of the two new integrated resorts.

Investment thesis: We have an Equal-weight rating on CDLHT given our view that the recovery in RevPAR is already in the price. We estimate that at current levels, CDLHT is trading at a terminal year RevPAR of ~S$220 – compared to the highest RevPAR achieved in 2008 of S$209.

CDLHT’s distributable income for Q3 slips 30.5%

CDL Hospitality Trusts (CDLHT) has posted distributable income of about $16.97 million for the third quarter ended Sept 30, 2009, a 30.5 per cent drop from the same period last year.

The $16.97 million is after deducting $1.66 million that the trust is retaining for working capital.

The net distributable income for Q3 2009 reflects a distribution per unit of 2.04 cents for the period, which is 30.4 per cent lower than the 2.93 cents in the same year-ago period. However, CDLHT will not be making a payout for Q3.

CDLHT owns five Singapore hotels, the Orchard Hotel Shopping Arcade as well as Rendezvous Hotel Auckland.

Although its Singapore hotels suffered a 28 per cent year-on-year decline in room revenue per available room (or RevPAR) to $154 in Q3 2009, this was the strongest quarter performance this year.

The Q3 showing was a ‘significant improvement compared to the 39.6 per cent year-on-year decline in RevPAR in Q2 2009’, CDLHT said. ‘Management expects the positive trend of an easing in year-on-year RevPAR decline to continue into Q4 2009.’

Beyond this year, the trust is ‘poised to participate in the next tourism growth cycle as new demand generators act as catalysts in enhancing Singapore’s appeal’, it added.

Gross revenue slipped 21.4 per cent year on year to $22.9 million for Q3.

Although the Singapore hotels were able to maintain their occupancy rates at 86 per cent in the third quarter of 2009 due to contributions from the Apec conference and the Formula One Singapore Grand Prix, the average room rates achieved for the quarter remained soft due to stiff market competition, which was fuelled by cutbacks in business and leisure travel following the global financial crisis.

Net property income fell 21.5 per cent to $21.4 million for Q3 2009.

The counter ended three cents higher at $1.59 yesterday.

Better occupancy, but room rates still soft

What has changed?

• CDL Hospitality Trusts (CDLHT) announced its 3Q09 results on 30 October. Net-property income was 1% below our forecast but distribution-per-unit (DPU) was 12% above our forecast.

Impact

• For its five Singapore hotels, the occupancy rate improved to 86.1% compared with 85.5% a year ago. However, daily revenue-per-available room (revPAR) declined 28% YoY to S$154 because average room rates slipped to S$185 from S$250 a year ago.

• The major positive variance in the results came from significantly lower-thanexpected net-finance costs. However, with its entire debt refinanced as of 31 July, we expect the net-finance cost to increase substantially for 4Q09.

• We have revised up our DPU forecasts by 3.8% for FY09, by 5.5% for FY10, and by 1.65% for FY11. We have revised up our occupancy assumption to 80% (from 77%) for FY09 and to 85% (from 82%) for FY10.

Valuation

• With roughly a 4% increase in our revPAR assumption for FY10 to S$177, we have raised our six-month target price based on our RNG valuation method (a finite-life Gordon Growth Model) to S$1.36 (from S$1.29). The NAV as of 30 September was S$1.41. On our revised forecasts, CDLHT would trade at a forward yield of 5.9%, one of the lowest in the sector.

Catalysts and action

• We maintain our 4 (Underperform) rating for CDHLT. Performance in 3Q09 was largely within our expectations and a strong recovery in Singapore revPAR is far from certain, in our view. We believe any integrated resort-related disappointment would pose a major investment risk for CDLHT investors.

At inflection point; on course to a ‘V’ recovery

3Q09 results in-line with expectations. CDLHT reported 3Q09 DPU of 2.04¢ (+7.9% QoQ). Annualised 9M09 DPU came in at 5.9¢, in-line with our FY09 forecast. Net property income rose 11.3% QoQ to S$21.4m on the back of higher RevPARs achieved for all of its hotel properties. RevPAR rose 14.9% QoQ due to a 10.6ppt surge in occupancy in 3Q09. Excluding the S$1.7m income retained for working capital, DPU would have been 2.23¢. Maintain BUY, DDM-derived TP of S$2.15.

At inflection point; trading at mid-cycle valuations. 3Q09’s strong QoQ DPU growth marks the beginning of a ‘V’ recovery, powered by the resurgence in tourism offerings. We are sanguine that CDLHT remains the best proxy to a multi-year tourism boom that will take place next year. We expect systemic occupancies to rise to 84% next year, with ARRs rising to S$250. As such, we estimate CDLHT’s FY10 DPU to spike 35% to 10.8¢, inching above the FY08 levels of 10.6¢.

Gained market share through lower rates. The prospects for Singapore tourism has been augmented with improving visitor arrival statistics. Singapore registered a 7.1% growth in visitor arrivals in Sept 09, its first growth since May 08. Better still, CDLHT’s registered a strong occupancy of 86%, significantly higher than the industry’s average of 79%. CDLHT’s strategy of keeping its ARRs lower (S$179 vs. industry’s S$187) resulted in higher RevPARs (S$154 vs. industry’s S$148). We believe CDLHT’s strategy of gaining market through lower rates will likely beef up its RevPARs in the short-term.

Euphoric aura could see yields compress to 5%. We believe the stabilising global economy and the twin openings of the IRs will remain as euphoric events in 2010, providing sustained performance for CDLHT’s stock price. Despite surging from its S$0.43 March lows, we do not think stock price is fully reflective of the sated impact of the IRs. In the heydays of 2007-08, CDLHT traded at ~5% yield, below the current 6.9% level. We suspect CDLHT could trade towards the 5% level within the next 12 months, implying a recursive fair value of S$2.15. CDLHT is top pick among S-REIT counters.