CDL Hospitality Trusts - DBS Research 2017-05-08: The “City” of Dreams

CDL Hospitality Trusts - DBS Vickers 2017-05-08: The “City” of dreams CDL HOSPITALITY TRUSTS J85.SI The Lowry Hotel Manchester

CDL Hospitality Trusts - The “City” of dreams

  • Purchases The Lowry Hotel in Manchester for GBP52.9m and on a 7.3% proforma FY16 NPI yield.
  • 2-3% uplift to FY17-18F DPU post acquisition.
  • Timely purchase to mitigate the near-term headwinds in Singapore.

Attractive valuations. 

  • We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a revised TP of S$1.75.
  • Although we expect the Singapore market to only recover in 2018, we believe the current low share price has largely priced in the current downturn and CDREIT offers compelling longterm value given its Singapore portfolio trades on a heavily discounted implied price per key. 
  • In addition, CDREIT offers patient investors an attractive 6.4% yield (based on 90% payout ratio) ahead of the eventual upturn.

Cheapest REIT to ride the eventual upturn. 

  • CDREIT’s implied price per key for its Singapore portfolio stands at around S$500,000 which is below its replacement cost of c.S$700,000, recent market transactions of above S$650,000, and that of other listed Singapore hospitality REITs of between S$650,000 and S$1m. Given the quality of the portfolio and CDREIT’s longterm track record, we believe this discount is unwarranted.
  • Thus, CDREIT is the cheapest REIT providing exposure to the upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressure eases.

Several mitigating factors during downturn in the Singapore hospitality market. 

  • While CDREIT’s core Singapore market faces a downturn, we believe this will be tempered by higher earnings contribution from New Zealand, following the appointment of Millennium & Copthorne Hotels as the new operator of CDREIT’s Auckland property and the negotiation of a more favourable lease structure. 
  • In addition, acquisition of The Lowry Hotel should minimise downside risks to earnings this year.

Acquires The Lowry Hotel Expands UK presence with initial entry into Manchester 

  • CDREIT announced that it has entered into an agreement to purchase The Lowry Hotel in Manchester, UK for GBP52.9m (approximately S$94.7m) and on a 7.3% proforma FY16 NPI yield. The total acquisition costs including stamp duty and fees stands at GBP53.8m (c.S$96.4m).

The Lowry a 5-star luxury hotel 

  • The property is a 5-star luxury hotel with 165 rooms, located in close proximity to the heart of the Manchester city centre and is 16km from the Manchester Airport. It is also in the vicinity of office developments such as Spinningfields, prominent retail establishments such as Amdale Shopping Centre, one of the busiest retail malls in the UK, as well as entertainment hubs such as Royal Theatre Exchange, the Manchester Opera House and Manchester Arena. 
  • The hotel is synonymous with the Manchester United Football club, given the football manager resides in the hotel.
  • The property was only recently refurbished in 2015 and 2016, and reported a 6.9% y-o-y increase in revenue per available room (RevPAR). Average daily rate and occupancy were reported to be at GBP160 and 80% respectively. 
  • A significant proportion of the guests are in the leisure category (less than 60%) as there is a large component of guests who travel to Manchester for football matches and concerts. The remainder are corporate customers who have a lower yield than leisure customers (in the low GBP100’s). 
  • In addition, with 38 Premier League matches being hosted in the city each year, weekends see the strongest demand. Seasonality is also present on a quarterly basis, with first quarter being the weakest and fourth quarter the strongest.

100% debt-funded acquisition with 2-3% DPU accretion 

  • CDREIT intends to fully fund the acquisition with offshore GBP-denominated debt through a fresh multi-currency bridge loan which we have assumed has an interest rate of around 2.5%.
  • We estimate a 2-3% uplift to our FY17-18F DPU post the acquisition of The Lowry Hotel in May 2017. 
  • Gearing is likewise expected to rise to c.39% from 36.8% as at endMarch 2017. 
  • In terms of geographic exposure by NPI, CDREIT’s presence in the UK will rise from 6% to 11%, with the contribution from Singapore dropping from 62% to 59%.

Positive development despite some risks 

  • We are generally positive on the acquisition given the DPU accretion as well as helping CDREIT buffer its earnings near term due to the headwinds in Singapore and Maldives. 
  • In addition, based on the disclosed information, the property provides CDREIT exposure to a city that has 
    1. a higher than average GDP growth (2.9% in 2016 versus 1.8% for the rest of the UK), 
    2. major development projects including the expansion of rail and airport infrastructure as well as large mixed-use redevelopments (GBP800m N.O.M.A and GBP1bn St John’s quarter projects) which should improve the city’s future economic growth prospects, and 
    3. strong demand from football-related sector given two leading football clubs are located in the city (Manchester United and Manchester City).

Some risk but mitigating factors in place 

  • While there may be some push-back from certain investors given gearing will now climb to c.39%, we take comfort from the fact that the acquisition is naturally hedged with GBP-denominated debt. 
  • In addition, Brexit is a risk but in our view, this is partially mitigated by the fact that 60% of the room nights are sourced from domestic guests, with the Manchester economy being more diversified and less exposed to the financial services sector than say London. 
  • To manage its FX exposure, CDREIT intends to hedge in excess of 50% of its GBP income two quarters forward (we have conservatively assumed GBPSGD FX rate of 1.70 over the next couple of years). 
  • Furthermore, we understand new hotel supply is expected to grow at a CAGR of 5.3% over the next three years. This could be a headwind to the property despite the prospects for strong demand growth. 
  • To price in this risk, we have assumed flat ADR performance over the next three years.

Maintain BUY, with revised TP of S$1.75 

  • Following the upward revisions to our earnings estimates, we raised our DCF-based TP to S$1.70 from S$1.75. 
  • With 13% capital upside and 6.4% yield, we reiterate our BUY call. 
  • We believe with CDREIT tempering the downside risk to earnings this year with the acquisition of The Lowry Hotel, at current levels, CDREIT offers an attractive entry point to an expected recovery in the Singapore hospitality market next year.

Key Risks to Our View

Weaker-than-expected demand supply outlook in Singapore.

  • The key risk to our view is a weaker-than-expected demand-supply outlook for the Singapore hospitality market

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | 2017-05-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.750 Up 1.700