We revise our distributable income forecasts to S$67.9m (-8%) for FY09, attributed to a lower financing cost of 3.2% (50bp lower than we expected), and S$58.1m (+23%) for FY10. We now assume a 25% yoy (from 20%) decline in RevPar in FY09 and 10% yoy decline (from 15%) in FY10. We expect a decline in FY10 RevPar, in view of the strong supply pipeline in 2009-10, which represents 40% of current stock. We estimate tourism arrivals must grow 25% yoy in 2010 and 13% yoy in 2011 for hotels to achieve 80% occupancy; a tall order given a still sluggish global economy. RevPar grew 11% yoy during the 2007 boom period. Our improved FY10 RevPar assumption reflects expectations of higher weekend occupancy rates, which are currently about 70% vs close to 80% on weekdays, as the Integrated Resorts could boost the number of leisure travellers.
CDREIT will be reviewing its dividend payout policy in 2H09, and a decision on whether to reinstate the 100% payout should be reached by year-end. The trust cut the payout to 90% (from 100%) from 3Q08 in order to increase its financial flexibility amid a tight credit environment. According to our channel checks, credit spreads have since declined some 30- 100bp qoq for real estate companies, and therefore this reduction may no longer be necessary.
Our DCF-based target price of S$1.14 (from S$1.00) is derived by discounting CDREIT's distributable income by its cost of equity of 9.1%. Dividend yield is 7.4% for FY09F but drops to 6.3% for FY10F due to our lower RevPar assumptions. Downgrade to Hold (from Buy).
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