Hotel Reit trades between 85 and 86 cents

CDL HOSPITALITY Trusts, Singapore's first hotel-backed real estate investment trust, saw its price rise to 85.5 cents on its trading debut, up 3 per cent from its issue price of 83 cents. Intraday price graphs show the price rose to a high of 86 cents and did not fall below 85 cents. Over 15 million units changed hands.

CDL Hospitality's initial public offering had been two times subscribed, with the public tranche subscribed 6.6 times. A total of 425 million shares were up for sale, with 410 million placed out to institutional and other investors, and 15 million offered to the public. The issue raised $352.8 million. The trust is a stapled group comprising CDL Hospitality Business Trust, which is currently dormant, and CDL Hospitality Reit (H-Reit), which contains four hotels and a shopping arcade worth a total of $846.3 million. These are the Grand Copthorne Waterfront Hotel, the M Hotel, the Copthorne King's Hotel and Orchard Hotel, as well as the Orchard Hotel Shopping Arcade.

'Hotel earnings are volatile,' Credit Suisse analysts Melissa Bon and Ernest Fong wrote in a report. They compared CDL Hospitality to Ascott Residence Trust (ART), a pan-Asian service residence Reit. 'At a 6.37 to 6.69 per cent yield, H-Reit offers a 45 to 110 basis point premium to ART. This premium differentiates the earnings volatility of hotels compared with the relatively stable service residences,' they said.

The fixed rent and service charge components in hotel earnings protect against downside risk, while variable rent allows for upside when hotel rents rise. 'Based on the prospectus forecasts, approximately 45 to 47 per cent of total revenues for FY06-07E are variable,' the analysts said.

CDL Hospitality's management aims to shift guest mix towards the higher-yielding corporate segment, as well as increase room rates, they said. This is based on the Singapore Tourism Board's aim to double visitor arrivals from 8.3 million in 2004 to 17 million by 2015, which would exceed the expected new supply of hotel rooms in the mid- to long term. Within the Millennium & Copthorne Hotels group, two hotels - Copthorne Orchid Hotel and Garden Hotel - are being redeveloped, they said.

SINGAPORE'S first-ever hotel real estate investment trust (Reit) has finally been launched, and will no doubt add variety to Singapore's Reit market, which is expected to keep growing. But while celebrating the arrival of yet another Reit on the market - all the better to make Singapore Asia's 'Reits hub' after Japan - investors should be concerned that CDL Hospitality Trusts does not seem to have a firm acquisition strategy. The Reit is a stapled trust based on a hospitality Reit (CDL Hospitality Reit, or H-Reit) and a business trust (CDL Hospitality Business Trust, or HBT). HBT will be dormant at the time of listing.

H-Reit's assets now comprise four hotels in Singapore and a shopping arcade in one of the hotels - worth $846.3 million in all. But while the asset size and spread is respectable for a Reit dealing with a less volatile industry, market watchers think that for a Reit dependent on the hospitality business, assets with a greater geographical spread might prove more tempting to investors.

On paper, there is no reason why the Reit cannot acquire properties outside Singapore. H-Reit is after all sponsored by City Developments' London-listed subsidiary Millennium & Copthorne Hotels (M&C), which has 105 hotels in 18 countries around the world. However, the hotels group has only granted the right of first refusal to H-Reit over future sales by, and offers to, M&C for hospitality assets in Singapore for a period of five years from the listing date. The Reit's prospectus adds that M&C's remaining 101 hotels may form potential acquisition targets for H-Reit. However, during the Reit's launch last Monday, CityDev executive chairman Kwek Leng Beng said that M&C's hotels outside Singapore were not included in the Reit at the moment for a variety of reasons, including tax. The very same reasons might make these overseas assets difficult for H-Reit to acquire in the future.

The Singapore hotels sector is looking forward to boom times. Investment bank UBS, for example, believes that hotel room rates will increase steadily over the next three years. H-Reit's four hotels will certainly benefit from this.

The yields H-Reit is offering to investors seem reasonable. Based on the offer price of 83 cents a share, H-Reit has a projected distribution yield of 6.37 per cent for the annualised six months ending Dec 31 and 6.69 per cent for 2007 - lower than the recently launched Cambridge Industrial Trust, but higher than the last Reit to be listed on the Singapore Exchange, Frasers Centrepoint Trust.

Future returns

But while the yields seem fine for the first two years, investors need to know where future returns are coming from. H-Reit needs a clear plan for future acquisitions to continue delivering returns to shareholders. In addition, little is known about the dormant HBT. Investors should not forget that they are purchasing two separate trusts.

According to the prospectus, HBT might become active if it 'undertakes certain hospitality and hospitality-related development projects, acquisitions and investments which may not be suitable for H-Reit'. More details are needed on the plans for HBT.

Vincent Yeo, chief executive of M&C Reit Management Ltd (H-Reit's manager), said during the Reit's launch that the Reit's aspirations are definitely cross-border. Potential acquisitions could come from the rest of Asia and the Middle East, and Mr Yeo sees great potential in the Middle East. A lot depends on how H-Reit charts its expansion course after listing.

Extracts fm Lim and Tan Report dated 14-Jul-06,

Acceptable Yield

• This is a stapled group comprising CDL Hospitality Reit (H-Reit) and CDL Hospitality Business Trust (HBT). (Note HBT is dormant, until it should “expand into other activities on its own such as project management and asset acquisitions”.)
  
• A total of 425 mln stapled securities are being offered for subscription at 83 cents each:
  
  
  
  • 15 mln public offer; and
    
  • 410 mln placement.
  
  
• CHT’s initial portfolio comprises 4 hotels and one shopping mall:
  
  
  
  • Orchard Hotel (653 rooms) & Shopping Arcade (53,166 sf of rentable space);
    
  • M Hotel (413 rooms);
    
  • Copthorne King’s Hotel (310 rooms); and
    
  • Grand Copthorne Waterfront Hotel (539 rooms).
  
  
• Except for Grand Copthorne Waterfront, which is sold by City Developments, the rest are sold by Millennium & Copthorne PLC, which is in turn 53% owned subsidiary of City Dev. M&C will end up with 39% of CHT.
  
• CHT expects to pay 2.65 cents for 6 months to Dec ’06, thereby yielding 6.37% on an annualized basis @ 83 cents, and 5.55 cents in 2007 to yield 6.69%.
  
• The Public Offer will close at noon on Monday July 17th. Trading commences at 2pm on Wednesday July 19th.

COMMENTS

1. CHT, Singapore’s first hotel reit, offers exposure to a sector that is, we believe, in the midst of a multi-year recovery, and especially heading into 2009/2010, when Singapore’s first two casinos are expected to be completed. (The Singapore Tourism Board has projected a doubling of tourist arrivals to 15 mln by 2015.)
   
2. However, unlike Ascott Residence Trust (ART), CHT will not benefit fully from this, being constrained by the Master Lessee agreement with M&C, the sponsor of the reit. Based on 2005 numbers, CHT would have benefited less than 40% of the recovery in room rates. (There are no such constraints on ART.)
   
3. Also, in the area of growth through acquisitions, CHT does not enjoy ART’s right of first refusal over its parent Ascott Holdings’ portfolio of serviced residences.
   
4. While we would not rule out HBT’s potential involvement in Sands Marina IR, given the strong relations between City Dev and LA Sands, this will not materialize for a while, even if it were to turn out to be the case.
   
5. Still, the initial yield of 6.37% is attractive, as is the 5.6% yield of ART @ $1.09.