CDL Hospitality Trusts eyes Japan acquisitions

It’s considering sprucing up Orchard arcade or turning it into hotel rooms

CDL Hospitality Trusts (CDLHT), the biggest hotel owner in Singapore, is looking at the Japan market with ‘great interest’ for potential acquisitions as it now offers ‘pricing levels not seen for many years’.

CDLHT, a stapled group comprising CDL Hospitality Real Estate Investment Trust (H-Reit) and CDL Hospitality Business Trust (HBT), is also mulling whether to spruce up Orchard Hotel Shopping Arcade or convert it into hotel rooms.

If converted, the 53,000 sq ft facility could yield about 78 hotel rooms, which would add to Orchard Hotel’s existing 653 rooms.

‘We’re are still doing studies and to some extent waiting for construction costs to reach more reasonable levels,’ Vincent Yeo, CEO of M&C Reit Management, said yesterday in an interview with BT. M&C Reit Management is the manager of H-Reit.

CDLHT yesterday posted a 68.7 per cent jump in second-quarter distributable income to $25 million. For the first half ended June 30, 2008, distributable income jumped 79 per cent to $48.6 million, on the back of organic growth across the portfolio as well as a full period’s contribution from Novotel Clarke Quay, which was acquired on June 7, 2007.

‘I like the acquisition environment today much better than what we have experienced in the last couple of years. Because of the tight credit conditions today, there are more motivated sellers and there are more deals that we’re seeing now, and consequently this means that we can be a lot more selective in terms of location and strategic assets,’ Mr Yeo added.

‘Japan has also gone through a very adverse credit situation and there are a lot of deals. Assets as recently as last year used to trade at 4 per cent yield. We’re now seeing them gravitate above 6 per cent,’ he said.

CDLHT’s gearing level as at June 30, 2008, stood at 20.3 per cent.

Despite softness in Singapore visitor arrivals in June, CDLHT’s Singapore hotels posted average occupancy rate of 87.1 per cent in Q2 ended June 30, 2008, up 1.1 percentage points from 86 per cent for proforma Q2 2007 (assuming Novotel Clarke Quay had been acquired on April 1, 2007).

Revenue per available room increased 30.6 per cent year-on-year to $222 in Q2 2008. Mr Yeo noted that the dip in Singapore’s visitor arrivals in June was mitigated by the increase in the average length of stay per visitor.

CDLHT’s hotel portfolio comprises Orchard Hotel, Grand Copthorne Waterfront, M Hotel, Copthorne King’s Hotel and Novotel Clarke Quay in Singapore, and the Rendezvous Hotel Auckland in New Zealand.

CDLHT posted a 42.4 per cent year-on-year jump in Q2 gross revenue to $29.5 million. For the first-half, gross revenue increased 48.3 per cent to $57.4 million.

Unitholders will receive a total distribution per unit of 5.89 cents for the first half comprising 5.37 cents of taxable income and 0.52 cent of tax-exempt. The total payout works out to an annualised figure of 11.84 cents, reflecting an 8.2 per cent annualised distribution yield based on CDLHT’s closing price of $1.45 yesterday. The counter ended one cent lower from the Tuesday close.

CDLHT’s net asset value per stapled security stood at $1.61 as at June 30, unchanged from the Dec 31, 2007 figure.

‘While we are cautious over the outlook for the remainder of 2008 due to the weakness demonstrated in visitor arrivals in the month of June, we still expect to register growth for the next reporting period.

‘We believe that the general outlook for the hotel industry continues to be positive over the medium and long term,’ CDLHT said.

Outstanding RevPAR growth

Story: CDL HT reported a strong 2Q08 performance of a 42.4% and 41.7% growth in gross revenues and NPI to $29.5m and $27.7m respectively. Distributable income grew 68.7% to S$25m, translating to a DPU of 3.03 cts for the quarter. Together with 1Q08, unitholders are getting a DPU of 5.89 cts, which works out to an annualized yield of 8.18%.

Point: Main driver for a strong overall performance was largely organic with their hotel portfolio registering growth in excess of 12% yoy. Singapore hotels outperformed, registering revenue growth in excess of 20%, with a full quarter contribution from Novotel Clarke Quay. RevPAR was impressive; its Singapore hotels grew c30% yoy to $222 while occupancies remained high at 87.1% for the quarter. Average daily rate for its Singapore hotels was $255, which exceeded our full year forecast of $240.

While management expects 2H08 to remain stable with RevPar growth moderating due to a higher base, in our estimates, we have chosen to be conservative in our RevPAR assumptions taking into account; (i) potential slowdown in tourists growth on the back of inflationary factors, (ii) Olympics fever in Beijing diverting away tourist attention. Therefore, we adjust forward RevPAR growth in FY08 to 25% and 8% in FY09, keeping occupancies stable at 85%.

Relevance: Maintain BUY, TP is reduced to S$2.02 from S$2.90. Our DCF valuation incorporates a higher risk free rate of 3.9% and lower terminal growth of 1.5%. CDL HT is currently trading at 0.9x P/BV and offers investors a 7.9% and 8.4% FY08-FY09 DPU yield.

2QFY08: DPU up 43.6% yoy to 3.03 S cents; RevPAR grows 31% yoy

CDL Hospitality Trust (CD REIT) reported yoy revenue and net property income (NPI) growth of 42.4% and 41.7% to S$29.5m and S$27.7m respectively in 2QFY08. DPU of 3.03 S cents was 43.6% higher yoy.

Strong top-line growth. Net property income surged 41.7% yoy to S$27.7m on the back of 42.4% yoy revenue growth. This was mainly driven by organic growth from Revenue Per Available Room (RevPAR).

Singapore – still a strong growth engine; outperforming industry. Both the New Zealand and Singapore markets saw double-digit RevPAR growth. Again, the Singapore market delivered an impressive RevPAR growth of 31% to S$222, contributed by a strong average occupancy rate (AOR, +1.1 ppt higher yoy to 87.1%) and average daily rate (ADR, +29% higher yoy to S$255). CD REIT’s five Singapore hotels are outperforming the industry which saw a 1-5 ppt drop in AOR rate despite 20-30% yoy ADR growth in the period. This is in line with our view that business travel, which CD REIT mainly targets, is more resilient than leisure travel to inflation. Management indicated that even in Jun 08, when Singapore saw a dip in tourist arrivals, the REIT’s portfolio still enjoyed a laudable 87% occupancy rate.

Low gearing ratio of 20.3%. CD REIT has minimal debt obligation (S$24m) that needs to be refinanced in FY08. The ample debt capacity provides a headroom of about S$400m for acquisitions, assuming 45% optimal gearing ratio (D/A).

DPU in line with forecast. 2QFY08 DPU of 3.03 S cents (43.6% higher yoy), coupled with DPU of 2.86 S Cents in 1QFY08, accounted for 55% of our full-year DPU forecast. The annualised 1HFY08 DPU is slightly ahead of our forecast and market consensus.

Outlook. Management guided that the forward booking in July remained strong and expected growth in 3QFY09 on a yoy basis. The REIT is still exploring opportunities for acquisitions. We agree with management that more opportunities could emerge as cap rates are generally higher now than before the US sub-prime crisis.

Outstanding REVPAR growth

• In line. 2Q08 results were in line with Street and our expectations. DPU of 3.03cts forms 28% of our full-year forecast of 10.9cts. Gross revenue of S$29.5m surged 42.4% yoy, led by full contributions from Novotel Clark Quay and outstanding growth in revenue per available room (REVPAR). 1H08 DPU of 5.89cts was in line with our expectations, at 54% of our full-year estimate.

• Outstanding REVPAR, contrary to official statistics. CDLHT’s Singapore hotel REVPAR of S$222 in 2Q08 was up 30.6% yoy. This was attributed to a 29.4% surge in average daily rates to S$255 and a 1.1%-pt growth in average occupancy rates to 87.1%. The growth in occupancy defied STB’s recent statistics showing a 3.4%-pt drop in average occupancy rates for Singapore hotels to 83%.

• REVPAR to moderate in 2H08; acquisitions difficult. Following two months of negative newsflow on the Singapore hospitality sector, CDLHT’s share price had fallen some 28% from its last high of S$2.01. While rising inflation, an appreciating S$ and slowing visitor arrivals are valid concerns, we believe REVPAR growth will slow but not collapse in 2H08 as: 1) Singapore’s hotel supply remains tight till 2010; 2) rising construction costs will benefit existing hotels; and
3) CDLHT’s well-located mid-tier hotels have room for upside in relation to 5-star hotels. Nonetheless, its sharply depressed share price has pushed up trading yields to about 7.8%, which far exceeds our assumption of a 5.6% net property yield (for Singapore assets), making acquisitions in the near future difficult.

• Downgrade to Neutral from Outperform with lower target price of S$1.78 (from S$2.38). In view of CDLHT’s strong REVPAR performance, we have raised our FY08 occupancy assumption for its Singapore portfolio to 86% (from 84%), and average room rate growth assumption to 38% (from 33%). However, we now assume no new acquisitions for FY08. Overall, we raise our FY08 DPU estimate by 3.2% but cut our FY09-10 estimates by 8-9%. Our DDM-based target price
(discount rate 8.5%) correspondingly drops to S$1.78 (from S$2.38).

In an upswing

• Largest hotel owner in Singapore. CDLHT is a stapled group comprising H-REIT, a real estate investment trust which owns six hotel properties and one shopping arcade; and HBT, a business trust which is currently dormant. CDLHT is the largest Singapore hotel owner with 2,327 room keys, representing a 6% share of the hotels in Singapore.

• Tourism targets to drive demand for hotel stay in Singapore. The government has set aggressive targets for tourism in Singapore, aiming to triple tourism receipts to S$30bn and double visitor arrivals to 17m by 2015. These targets should drive the demand for hotel accommodation in Singapore over the next eight years.

• Sustainable performance despite large upcoming hotel supply. New hotel rooms in 2008-10 are expected to add some 37% to the current room stock. However, we see resilience in CDLHT’s portfolio, from: 1) its centrally located Singapore assets with mid-tier pricing; 2) concentration on less price-sensitive business travellers; 3) price advantage over new hotels which face high construction costs; and 4) the possibility of demand outstripping supply if Singapore’s tourism targets are met.

• 8.2% DPU CAGR for 2008-10. CDLHT is poised for growth via acquisitions and growth in revenue per room (REVPAR) from 2008 to 2010. We expect CDLHT to acquire S$300m of properties each year from 2008 to 2010, expanding its portfolio to about S$2.5bn by end-2010. In addition, we expect REVPAR growth of up to 25% for its Singapore hotels in the same period. On this basis, we forecast a DPU CAGR of 8.2% for 2008-10 for CDLHT.

• Initiate with Outperform and DDM-derived valuation of S$2.38. We arrive at our target price of S$2.38 using DDM valuation (discount rate of 8.5%, terminal growth rate at 3%). This represents a total return of 24% from a forward yield of 5.6% and potential price upside of 18.4%.