After completing its last hotel acquisition just three months ago, CDL Hospitality Trusts (CDLHT) says it remains on the lookout for properties, particularly within Asia, given the growing economy and strong demand for accommodation as tourist numbers continue to rise.

But for now, Vincent Yeo, CEO of the manager of CDLHT, says the real estate investment trust (REIT) is extracting organic growth from its portfolio of hotels through an asset enhancement scheme. The majority of rooms and the Executive Club Lounge at its Orchard Hotel have been given a makeover, and the refurbishment of the remaining 108 rooms and meeting areas is to be completed by September. Similarly, more than three-quarters of the 401 rooms at Novotel Clarke Quay have been renovated. The hotel's Club Lounge is undergoing upgrading, and all works at the property are scheduled to be finished early next year.

Although analysts estimate that CDLHT still has about S$450 million (RM1.12 billion) in debt headroom for another asset purchase, Yeo says further hotel acquisitions in Singapore will be difficult even though the city remains a favoured market. "The constraint is really assets that offer good value. There are assets for sale in Singapore, but price-wise, I think the vendors' expectations are very high."

In May, CDLHT completed the acquisition of Studio M on Robertson Quay from its sponsor, London-listed Millennium & Copthorne Hotels (M&C Hotels), and is now the largest hotel owner in Singapore, with 2,713 rooms. M&C Hotels had given a right of first refusal to sell its Singapore properties to the trust for a five-year period starting from CDLHT's listing in July 2006. CDLHT paid S$154 million, or about S$428,000 per room for Studio M. The property has contributed positively to the trust's operating performance for 2Q11 ended June with S$1.65 million in net property income, and Yeo says its average revenue per available room (RevPAR), an industry benchmark of growth, of S$168 has been better than expected.

Rise in trading of hotel assets Indeed, along with much of the hospitality industry in Singapore and the region, business hotels have seen occupancy and room rates picking up as the global economy recovered from the financial crisis and business and travel activity resumed. Hence, as hotels perform better or, in some cases, as banks speed up the workout programmes for distressed assets going into administration, industry watchers are expecting a rise in the volume of hotel-asset sales worldwide.

According to hotel investment services firm Jones Lang LaSalle (JLL), US$14.8 billion (RM44.5 billion) in hotel assets worldwide changed hands in 1H11, more than double the amount in 1H10. In its recent quarterly industry analysis, the brokerage estimates transactions could total US$34.8 billion for the full year.

JLL says top hotels in key US cities have been attracting buyers from Hong Kong, China and Singapore, and that acquisition volumes could be in the "low double digits" this year. In 1H11, the Americas registered a 187% year-on-year (y-o-y) growth in transaction volumes to US$7.4 billion, which the brokerage says was driven by large single-asset deals in places such as New York. Hotel sales in the region are expected to reach US$16 billion for the year.

The deals are already adding up. About a week ago, Hong Kong jewellery billionaire Cheng Yu-tung's New World Development property firm paid US$570 million for five luxury properties. This included the Carlyle Hotel in Manhattan, following an agreement to buy hotel manager Rosewood Hotels & Resorts.

Earlier this year, Chinese property investor Shenzhen New World Group reportedly bought the 451-room Sheraton Universal Hotel in Los Angeles for US$90 million, which would be well below the US$122 million that previous owner, Lowe Enterprises, paid in 2007. The LA developer and landlord had spent millions on improvements, but the hotel, which overlooks Universal City, fell into receivership as the financial crisis took its toll on the business. Shenzhen New World, which also owns and operates a hotel in China, had earlier paid US$63 million for the 469-room Marriott Los Angeles Downtown after lender GE Capital foreclosed, and is believed to be looking for more assets in the US.

Clearly, acquirers not only include REITs such as CDLHT but also other private investors such as family-owned companies with deep pockets. What's driving this trend? Will this affect CDLHT's acquisition and growth potential?

High-interest sector
CDLHT listed in July 2006 with the Orchard Hotel Shopping Arcade and four hotels in its portfolio — Orchard Hotel, M Hotel, Grand Copthorne Waterfront and Copthorne King's Hotel. In December 2006, the trust added the Rendezvous Hotel in Auckland to its portfolio. Six months later, in June 2007, it paid S$201 million for Novotel Clarke Quay. Then the financial crisis struck and it was only two years ago that it started looking for acquisitions again, buying a portfolio of five hotels in Brisbane and Perth in Australia for A$175 million (RM546.2 million) in early 2010.

DBS Vickers analyst Derek Tan notes that Yeo has a knack of buying properties at good prices, but adds that valuations now are really reflective of Singapore's growth prospects. For instance, there is strong travel demand into the country, with the Singapore Tourism Board expecting some 13 billion visitors this year.

JLL says Singapore dominated the hotel-transaction activity in Asia-Pacific, with more than US$1 billion in sales, and expects that acquisitions in the region could total US$2.75 billion for the full year. "We expect this figure to remain unchanged, as growth in countries like Singapore and Thailand is expected to offset decelerated activity in Japan as a result of the March 2011 earthquake," says CEO-Asia Scott Hetherington in a statement.

Indeed, the Ibis Novena at the junction of Balestier and Irrawaddy Roads was sold less than a fortnight ago by the Cockpit International group for S$118 million, or nearly S$490,000 per room. The buyer is said to be Grand Line International, controlled by Singapore businessman Michael Kum, who founded the offshore oil and gas services group Miclyn Express Offshore. The Kum family also owns Sheraton Four Points at Darling Harbour in Sydney, Australia and last year reportedly paid S$210 million, or S$390,334 per room, for Ibis International on Bencoolen Street.

The Kum family reportedly plans to list the hotel assets, including property in Japan, in a hospitality REIT, to raise some S$450 million. At the same time, Singapore's largest property developer Far East Organization is said to be planning to set up a trust with its existing hotel assets, including the Orchard Parade Hotel.

Analysts say this trend is not surprising, given investor demand, since Singapore has only one or two liquid names — CDLHT and Ascott Residence Trust, which deals more in long-term serviced apartments — and a robust outlook that promises strong hotel performance.

"Hotels in Singapore are largely family-owned or under a listed company, so they're quite tightly held," says DBS Vickers' Tan. "Hotel companies list their hotel assets based on a historical-cost basis, so it appears more attractive for them to list [the assets] in a REIT to realise more value."

"It's a good time, in so far as there's good interest in the hospitality market, and I think that among the various asset classes in property, hotels would have to be ranked up there in terms of prospects, so it would not surprise me to see people securitise their assets," CDLHT's Yeo says. "To put some money to work in the hotel industry is quite timely."

For 2Q11 ended June, CDLHT posted a 24% rise in net property income y-o-y to S$35.6 million. Distribution per unit (DPU) for the quarter is 15% higher, at 2.96 cents. During the quarter, CDLHT saw RevPar of S$205 across its six Singapore hotels, 5% higher y-o-y and just 7.7% shy of its S$222 peak reached in the same period in 2008, before the global financial crisis. The average occupancy rate for the quarter was 88.1%, higher than the national average of 85% for the first five months of this year, according to statistics compiled by the Singapore Tourism Board. Average room rates nationwide rose 12% from last year to S$228.80, while RevPAR of S$194.10 was 12.4% higher.

However, analysts do not expect average room rates to grow as dramatically as they have in the past few quarters, even as demand for rooms is still expected to outstrip supply. "We've seen growth rates of 28% in RevPAR last year, which is actually a phenomenal number. Generally, the hotel industry people are quite happy with growth rates in the high single digits or the teens," Yeo says. "So, this moderation doesn't come as a surprise." Whatever the case, analysts are comfortable with CDLHT's growth visibility. In fact, they expect stronger growth in 2H11, given the Formula 1 night race in September, for example.

Looking further ahead, the refurbishment of the properties "will help underpin the hotel's longer-term competitiveness and ‘extract more juice'", notes DBS Vickers' Tan in a recent report. He estimates rooms in the two properties will command up to 15% higher rates on average when renovations are completed, and "should enable higher earnings growth for the trust towards year-end". The brokerage has a "buy" call on the stock, with a price target of S$2.30. It notes that CDLHT currently offers a yield of 5.7% to 6.3%.

Meanwhile, Morgan Stanley has an "overweight" call, with a price target of S$2.35. "Current valuation is undemanding, as CDLHT trades at 5.9% estimated FY11 DPU yield, and we expect distributions to grow," analysts Brian Wee and Wilson Ng note in a July 27 report.  They forecast yields for FY12 to FY13 of 6.5% to 6.7%.

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