CDL Hospitality Trust - CIMB Research 2017-06-28: A Well-Engineered Move

CDL Hospitality Trust - CIMB Research 2017-06-28: A Well-engineered Move CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trust - A Well-engineered Move

  • Despite the dilution to DPU, we are, on balance, positive on the entire transaction as it demonstrates the manager’s acquisition nous and good capital management.
  • We decrease our FY17F-19F DPU by 7.4-8.9% to factor in 
    1. the Pullman acquisition, 
    2. the 1-for-5 rights issue and 
    3. paring down of gearing to 33.4%.
  • Nonetheless, the manager highlighted that the net effect of the acquisition would be accretive if CDREIT’s gearing is maintained at 36.8% (as at end-1Q17).
  • Upside risk would be further debt-funded, accretive acquisitions and better-than-expected interest savings from the paring down of debt.
  • At 1.09x FY17 P/BV and 6.1% FY18 dividend yield (0.5 s.d. above 5-year mean), we believe that Singapore recovery and acquisitions are priced in. Hold maintained.



Demonstrating acquisition nous… 

  • While the rights issue, at first glance, may seem negative, we think that, by looking at the equity raising and the two recent acquisitions (The Lowry and Pullman Munich) in its entirety, investors would come to appreciate the manager's acquisition/execution nous and good capital management. 
  • First, CDREIT continues to take advantage of the low funding environment in Europe to enjoy an attractive yield. Pullman's FY16 NPI yield stood at 5.6% vs. c.1.3% funding cost, while The Lowry's yield spread was c.4.8%.


… and good capital management 

  • Second, the trust has effectively recalibrated its debt mix with lower cost of debt. Proceeds from the rights issue (S$250m) would be largely used to pare down higher interest-bearing debt. For example, we note that CDREIT has US$-term loans totaling c.S$105m that expire in Oct 2018. 
  • CDREIT’s US$ debt carries a nominal interest rate of 2.55-2.8% vs. the group's all-in cost of 2.4% (as at 1Q17).


FY17F-19F DPU decreased by 7.4-8.9% 

  • Assuming a hypothetical scenario with the rights issue raising gross proceeds of S$167.8m (such that CDREIT's gearing is maintained at 36.8% as at end-1Q17), the manager highlighted that the net effect of both the acquisitions is expected to be accretive (sub-1% accretion to DPU). 
  • However, accounting for the entire S$255.4m rights issue, and incorporating the Pullman acquisition and paring down of gearing to 33.4%, we decrease our FY17F-19F DPU by 7.4-8.9%.


Further upside from debt-funded, accretive acquisitions 

  • Post-rights and paring down of borrowings, we expect CDREIT’s gearing to be brought down to 33.4%. Without which, CDREIT’s gearing would have risen to 42.6% after the two acquisitions. Assuming a 40% cap on gearing, we estimate that CDREIT would have c.S$300m debt headroom. 
  • We believe that the REIT is likely to continue its acquisition spree, as it seeks to take advantage of the current attractive yield spread.


Maintain Hold with an unchanged DDM target price 

  • We maintain Hold with an unchanged DDM target price (S$1.52). 
  • We raise our LTG to factor in a higher inorganic growth profile, which offsets the DPU downgrades. At 1.09x FY17 P/BV and 6.1% FY18 dividend yield (0.5 s.d. above 5-year mean), we believe that the Singapore hotel recovery and further debt-funded, accretive-acquisitions are priced in.
  • Downside risks are a slower-than-expected recovery in Singapore and Maldives markets.


Acquisition of Pullman Hotel Munich for €98.9m (S$153.8m) 

  • CDREIT has proposed to acquire the Pullman Hotel Munich (Pullman) for €98.9m (S$153.8m) or 5.6% FY16 NPI yield. The acquisition is expected to be completed 18 Jul 2017, which is also the last day of trading of rights entitlement.
  • We note that the acquisition comprises an effective interest of 94.5% in Pullman hotel.
  • Pullman is a four-star 337-key business hotel on freehold land. Between 2012- 16, c.€18m was invested towards the refurbishment of the Pullman hotel, which implies that no significant capex is expected in the near term. The property is in an excellent location, with its close proximity to Parkstadt Schwabing (a major business park which is home to industry heavyweights like Accenture, Amazon, MAN Financial Services and Microsoft).
  • Additionally, Munich is one of Germany's top performing markets with the highest ADR and RevPAR among German cities. The market is supported by corporate demand, leading trade fairs such as bauma and leisure (Oktoberfest, FC Bayern, etc.).
  • In terms of operating statistics, the average occupancy for Pullman is around 70% and average daily rate of €130-140. F&B and other non-room revenue is around 20% of the hotel’s gross revenue. Taking into account operating expenses, management fees, FF&E reserve (fixture, furniture and equipment), tax and SPV leakages, we calculate an NPI margin of c.28%. In terms of seasonality, the winter months (Dec-Feb) are generally the softer months while huge spikes can be observed in Sep-Oct.
  • In addition, the hotel will be leased and operated by EVENT Hotels, and will continue to operate under the “Pullman” brand. The management lease agreement is for 20 years, and CDREIT will receive 90% of the net operating profit of the hotel, subject to a guaranteed fixed rent of €3.6m. EVENT Hotels is also a 5.1% shareholder of the hotel.
  • On a side note, we point out that hospitality S-REITs have, over the past year or so, been diversifying to Germany. Ascott Residence Trust (ART) (Hold, S$1.05) recently acquired two serviced residences (one in Hamburg, the other in Frankfurt) from the parent for 5.4% FY16 EBITDA yield. Far East Hospitality Trust (FEHT) (Not Rated) acquired Maritim Hotel Dresden, in the city centre of Dresden, the capital of the eastern German state of Saxony, for 6.8% NPI yield in Jun 2016.


Underwritten and renounceable rights issue to raise gross proceeds of S$255.4m 

  • The rights issue comprises an offer of 199.5m rights based on 20 rights to every 100 units, at an issue price of S$1.28/rights or 20.7% to the TERP of S$1.613.
  • CDREIT's sponsor, Millennium & Copthorne Hotels plc, will subscribe fully for the pro rata rights entitlement, aggregating c.37% of the rights issue. The remaining rights are underwritten by DBS Bank. Proceeds from the rights would be used to pare down higher interest-bearing borrowings. The cum-rights date is 30 Jun 2017, and the ex-rights date is 03 Jul 2017. Post-rights and paring down of borrowings, we expect CDREIT’s gearing to be brought down to 33.4%.
  • Assuming a 40% cap on gearing, we estimate that CDREIT would have c.S$300m debt headroom.
  • While we expect further acquisitions, valid, longer-term concerns over the dilution of the core Singapore market as well as higher FX and interest rate risks should be raised, in our view. This is especially as the debt taken to fund the acquisitions is on a floating basis.




YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-06-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.520 Same 1.520



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