CDL Hospitality Trusts - RHB Invest 2017-06-29: Expanding Its Presence In Europe

CDL Hospitality Trusts - RHB Invest 2017-06-29: Expanding Its Presence In Europe CDL HOSPITALITY TRUSTS J85.SI

CDL Hospitality Trusts - Expanding Its Presence In Europe

  • CDLHT’s acquisition of a German hotel property provides income diversification and stability, with an upside potential from a variable rent structure. Post-acquisition, Germany would account for ~6% of NPI and asset value. 
  • It also announced a 1-for-5 rights issue to raise SGD255.4m, which while reduces gearing, is DPU dilutive. 
  • We continue to like CDLHT as it remains one of the best proxies to the expected recovery in the Singapore hospitality sector. 
  • Maintain BUY with a higher SGD1.70 TP (from SGD1.62, 4% upside), offering an 8% upside to its theoretical ex-rights price of SGD1.57.

Acquisition of Pullman Hotel Munich. 

  • CDL Hospitality Trusts’ (CDLHT) acquisition of an effective 94.5% stake for EUR98.9m (~SGD153.8m or EUR281,000/key) would be done at a slight discount (0.6%) to the latest independent valuation. It translates into a pro-forma FY16 NPI yield of ~5.6%. 
  • The acquisition is yield accretive with a pro-forma FY16 DPU accretion of 3.8%, assuming it is fully debt-funded. 
  • From 2012-2016, the property underwent a major refurbishment costing EUR18m with management guiding minimal capex ahead. 
  • The acquisition is expected to be completed on or around 18 Jul 2017. 

Long lease-term with attractive variable rent structure. 

  • Vendor EVENT Hotels (an unrelated third party) would continue to lease and operate the hotel and also hold a 5.1% stake in the asset, post transaction. 
  • CDLHT would receive rent at 90% of its net operating profit subject to a guaranteed EUR3.6m fixed rent. The lease, for 20 years from completion date, together with the variable rent structure provide stability and room for upside potential in our view.

Rights issue DPU dilutive but increases acquisition potential. 

  • In tandem with the recent acquisitions, CDLHT announced a 1-for-5 fully underwritten rights issue at SGD1.28/unit raising gross proceeds of SGD255.4m. 
  • While the steeply discounted rights issue (24% to yesterday’s closing price) is DPU dilutive, it also lowers gearing (~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. 
  • Sponsor Millennium & Copthorne Hotels has agreed to fully subscribe to its pro-rata entitlement of c.36.98%. 

Singapore hotels remain the key turnaround catalyst. 

  • Post-acquisition, Singapore remains its biggest earnings driver at c.~55% of NPI. While CDLHT’s Singapore hotel RevPAR is expected to decline by 2% in 2017, we expect RevPAR to rebound by 3% and 5% in 2018F-2019F. 
  • Key reason being the tapering off of the hotel supply and demand stabilisation. Near-term demand drivers include the opening of a new terminal in Changi Airport (3Q17), more calendar events in 2018, and sustained promotional efforts by the Singapore Tourism Board.

Maintain BUY. 

  • We adjust our 2017F-2019F DPU downwards by 3-4% to factor in the dilutive rights and acquisitions. In our DDM model, we lower our COE assumptions to 7.6% (from 7.9%) and assume a higher TG of 1.5% on the back of sustained low interest rates and better growth prospects. 
  • 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.

Vijay Natarajan RHB Invest | 2017-06-29
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.70 Up 1.620