Most of CDREIT’s debt (S$297m) matures in July 2009, but we see little refinancing risk as it is backed by sponsor Millenium & Copthorne, whose gearing is also low at 14%. Successful refinancing of this debt would be a strong catalyst for the stock, in our view, as refinancing risk would then be completely eliminated. We assume higher average cost of funds of 5.5% (from 3.2%) for CDREIT in 2009 as credit spreads widen, which will erode 2009 DPU by 9% on our estimates.

CDREIT’s relatively low gearing of 19% implies low recapitalisation risk. We estimate that even if RevPar falls 20% yoy in each of FY09 and FY10, leading to similar declines in valuation, gearing would reach only 22% in FY09 and 28% in FY10, well below the company’s target of 45%.

We estimate CDREIT’s lease structure with master lessees guarantees it a turnover of at least S$40m pa, translating to what we believe is a decent DPU of 2.6 cents or a yield of 3.6% pa. RevPar would need to decline 70% yoy in 2009 for the minimum rent floor to be triggered, which is highly unlikely, in our view. We project RevPar will decline 20% in each of FY09 and FY10, due to a slowdown in tourist arrivals and new supply of hotel rooms.

CDREIT’s yields of 11% in FY09F and 8% in FY10F are attractive vs the current 10-year government bond yield of 2.2%, despite our assumption of low RevPar and rising interest costs. The stock trades at a steep 54% discount to its September 2008 NAV of S$1.56. Upgrade to Buy.