SINGAPORE (June 29): RHB is maintaining its “buy” call on CDL Hospitality Trusts (CDLHT) with a target price of $1.70 given income diversification and stability from its latest German hotel property acquisition.
CDLHT on Tuesday announced the acquisition of a 94.5% stake in Pullman Hotel Munich for €98.9 million ($154.2 million) at a slight discount to its latest independent valuation.
(See also: CDL Hospitality Trusts acquires Munich hotel for $154 mil; launches $255 mil rights issue)
Expected to be completed around July 18, the acquisition translates into a pro-forma FY16 NPI yield of about 5.6%.
In a Thursday report, analyst Vijay Natarajan says, “The acquisition is yield accretive with a pro-forma FY16 DPU accretion of 3.8%, assuming it is fully debt-funded.”
The hotel underwent a major refurbishing from 2012 to 2016 which cost €18 million.
An unrelated third party, seller EVENT Hotels, will hold a 5.1% stake in the hotel upon completion of the acquisition and will continue to lease and operate it.
CDLHT will receive rent at 90% of its net operating profit subject to a guaranteed €3.6 million fixed rent.
Natarajan believes that the lease, lasting 20 years from its completion date and paired with a variable rent structure, will provide stability and room for upside potential.
In tandem with the acquisition, CDLHT announced a one-for-five fully underwritten rights issue at $1.28/unit raising gross proceeds of $255.4 million. Although the discounted rights issue is DPU dilutive, it also lowers gearing to 33.6%, providing more debt headroom.
“In the near term, it would use additional proceeds to repay some of its higher-rate debts thus lowering its financing costs. We also expect it to do more accretive acquisitions to mitigate the dilutive impact,” says Natarajan.
Still, Singapore will remain to be the group’s biggest earnings driver post-acquisition at about 55% of NPI.
Natarajan expects Singapore hotel RevPAR to decline by 2% this year but rebound by 3-5% in 2018F-2019F due to the tapering off of hotel supply and demand stabilisation.
Near-term demand drivers include the opening of the new Changi Airport terminal in 3Q16, more calendar events in 2018 and sustained promotional efforts by Singapore Tourism Board.
Natarajan comments, “CDLHT remains one of the best proxies to the expected rebound in Singapore’s hotel RevPAR, and is one of our Preferred Pick among the hospitality REITs.”
At 10.10am, units in CDLHT are trading at $1.64.
