Hospitality REITs – Where’s The Cream?

Hospitality, a mixed segment. Amongst the hospitality REITs which is represented by three stocks, CDL Hospitality Trust (CDREIT) provides a proxy to the tourism play, Ascott Residence Trust (ART) to the serviced residence segment, and First REIT (FIRT) to the healthcare industry. In comparison, CDREIT is very much Singapore-focused while the latter two offers a more regional exposure.

Remaking of Singapore main catalyst. Remaking of Singapore as a global city and ‘hub of hubs’ has brought about tremendous benefits to the hospitality industry and the hospitality REITs benefit in the following ways:

a) CDREIT – The tourism story in Singapore is well-known following the construction of IRs and the license to hold the Formula One Grand Prix. Hotels are set to benefit from the increase in visitor arrivals and room rates should rise in view of the short term limited supply of hotel rooms.

b) ART – Business and financial hub status of Singapore and growth of other Asian cities will spur demand for serviced apartments for expatriates and professionals. Globalization is a key factor in demand for serviced apartments in strategic locations worldwide. ART offers a regional exposure with assets in strategic locations.

c) First REIT – Beneficiary of medical tourism and Singapore as a healthcare hub with exposure to Indonesia and Singapore. First REIT has a higher yield in part of its riskier assets in Indonesia.

CDREIT to benefit in the short term. We believe that In the remaking of Singapore, tourism is a more compelling catalyst to the segment and CDREIT will benefit most in the short term. In addition, it has recently made its second acquisition of the Novotel Clarke Quay hotel since IPO, after its first acquisition of the Rendevous Hotel Auckland. The acquisition is expected to increase its DPU by 8.9% with an annualised property yield of 5.5% in FY07.

Our sensitivity analysis indicates that for every 10% increase in room rates, CDREIT’s yield will increase 0.25%-0.28%.