SINGAPORE (Nov 22): As CDL Hospitality Trusts (CDLHT) recently made the headlines for a divestment and forward purchase, market watchers highlight that these constitute a “well-structured asset swap” that will enable the REIT to maintain its hospitality presence.
In a Thursday report, Maybank analyst Chua Su Tye points out how CDLHT’s two recent transactions - its divestment of Novotel Clarke Quay (NCQ) and a forward purchase of the new turnkey hotel, as well as the acquisition of W Sentosa - pave the way forward for the REIT.
“[These] should strengthen its long-term Singapore hospitality presence,” says Chua. “We expect capital distributions to rise in the near term with potentially lower operational distributions,” says Chua.
The divestment of NCQ at $375.9 million to a consortium including joint venture vehicles of CDL, Capitaland, and its sponsor, the parent company of Millennium & Copthorne Hotels (M&C) was announced on Thursday.
See: City Dev, CapitaLand lead consortium to redevelop Liang Court site at Clarke Quay
According to Chua, this will result in a $39.8 million gain for CDLHT on its aging assets acquired at $201.0 million back in 2007. The gain would further be bolstered by CDLHT’s purchase of a new hotel from its sponsor in 2025 - which boasts a valuation cap of $475 million and a 5.6% stabilised net property income (NPI) yield, which in turn mitigates near-term execution risks.
According to RHB analyst Vijay Natarajan, the acquisition is slated to deliver all the goods for CDLHT.
“The proposed transaction is positive as it helps to rejuvenate an old asset into a higher-end hotel with a fresh 99-year lease term (currently 57 years), eliminates higher capex needed to maintain the ageing asset, and benefit from the increased vibrancy in the Liang Court area with the acquisition price to be paid only upon completion,” says Natarajan in a Friday report.
In addition, the REIT’s Singapore RevPAR recovery is expected to gain traction in 2020 on the back of stronger corporate demand, backed by a constructive supply outlook. Coupled with the acquisition of W Sentosa for $324 million at an NPI yield of 3.1%, Chua attests that this should partially offset lower distributions that are likely to arise from the REIT’s NCQ divestment.
“With this purchase, its Singapore AUM remains steady at 62%, while its NPI contribution rises from 53% to 57%. Near-term RevPAR growth is likely to be capped by new supply on Sentosa, but Singapore’s on-going leisure tourism initiatives should support longer- term growth prospects,” shares Chua.
“Management expects a 0.9% DPU accretion on a standalone basis for the deal, assuming a fully debt-funded transaction,” adds Chua.
Analyst Chu Peng from OCBC Investment Research opines that the transactions, apart from being DPU accretive, are largely beneficial to the REIT.
"Both transactions are DPU accretive, with 2.7% DPU accretion on a pro forma FY 2018 basis," says Chu. "We see the transactions as largely positive for CDLHT’s ong-term growth to further penetrate in Singapore’s lifestyle hotel market."
However, some analysts are wary of certain repercussions that the swap could have on CDLHT. Chu for one, is especially aware of the transactions' effects on the REIT's distributions in the near term.
"We are likely to see lower distributions and a slight drop in DPU in the short term due to the divestment of NCQ and the acquisition of W Hotel is not able to fully mitigate the divestment impact. However, the net sale proceeds from NCQ could be used to smoothen out DPU," says Chu.
Natarajan however chooses to exercise some caution over the macroeconomic situation, but is quick to highlight that this is not insurmountable.
“While we are slightly concerned over the impact of micro-market supply increase that came on stream this year, the asset offers mid-term potential from the Greater Southern Waterfront (GWS) redevelopment plans,” says Natarajan.
“The above transactions are DPS accretive ( proforma FY18) on a standalone and combined basis,” adds Natarajan. He also noted that the deals are subjected to unitholder approval, and are expected to be completed by 1Q20.
Looking ahead, Maybank is maintaining CDLHT as its top hospitality REIT pick, due in part to the fact that its most recent target price reflects a 19% total return upside.
Chua also points out that after the transactions, CDLHT’s further acquisitions are supported by low gearing of 35.3% and some $512 million in debt headroom.
Natarajan shares the view, noting that more acquisitions are in the pipeline for CDLHT, especially since the acquisition of W Sentosa will be funded by a combination of divestment proceeds and debt.
“Management noted that it will be aggressively looking for more acquisitions within Singapore (potentially M social from its sponsor) as well as European cities being its preferred markets,” says Natarajan.
On the back of renewed optimism on CDLHT’s recent plans for what appears to be an asset restructuring, all three brokerages are maintaining their “buy” calls on CDLHT. Maybank and RHB have unchanged target prices of $1.80 and $1.78 respectively, while OCBC has a target price of $1.69.
As at 3.05pm, units in CDLHT are trading flat at $1.59. This translates into a price-to-book value (P/BV) ratio of 1.0 times and a dividend yield of 5.8% for FY20F according to RHB valuations.
