CDL Hospitality Trusts - Maybank Kim Eng 2019-11-21: Well-Structured Asset Swap

CDL HOSPITALITY TRUSTS (SGX:J85)

CDL Hospitality Trusts - Well-Structured Asset Swap

CDL HOSPITALITY TRUSTS (SGX:J85)’s 2 transactions - its divestment of Novotel Clarke Quay, together with a forward purchase of the new hotel, and acquisition of W Sentosa should strengthen its long-term Singapore hospitality presence. See CDL Hospitality Trust Announcements; CDL Hospitality Trust Latest News.
They result in a 2.7% pro-forma DPU accretion and raise Singapore’s AUM and NPI to 68% and 64% from 2025. We will adjust estimates after Jan 2020’s EGM, but expect capital distributions to rise in the near term with potentially lower operational distributions. See See CDL Hospitality Trust Dividend History.

Meanwhile its Singapore’s RevPAR recovery should gain traction into 2020 on stronger corporate demand, backed by a constructive supply outlook.
Post-deal, further acquisitions are supported by low 35.3% gearing and SGD512m in debt headroom.
CDL Hospitality Trusts remains our top hospitality REIT pick with 19% total return upside to our DDM-based SGD1.80 Target Price (COE: 7.3%, LTG: 2.0%). See CDL Hospitality Trust Share Price; CDL Hospitality Trust Target Price.

CDL Hospitality Trusts will
1. divest Novotel Clarke Quay for SGD375.9m to the City Developments (SGX:C09)-CapitaLand (SGX:C31) consortium owning Liang Court, at an 87% premium to its SGD201.0m purchase price in 2007, 12.9% above its end-Dec 2018 valuation and 1.5-2.0% above independent valuations as at 15 Oct 2019, and
2. acquire the new hotel at the lower of the fixed price of SGD475.0m or 110.0% of its development costs.
Management expects to realise a 5.6% NPI yield on both its divestment and acquisition achieved on a stabilised basis, to result in a 2.0% DPU accretion (pro-forma).
The property has a remaining 57-year land lease and likely requires significant capex/ AEI. It is well located within the Singapore River precinct; Clarke Quay is a popular tourist/ entertainment area with limited new hotel supply, and it is accessible and well-connected to two major MRT lines.
A forward purchase of the new hotel on a fresh 99-year lease term, with a cap on development costs before its completion in 2025, will enable CDL Hospitality Trusts to maintain its hospitality presence in this prime location, while mitigating near-term execution risks.
See also
- CapitaLand Announcements; CapitaLand Share Price;
- City Developments Announcements; City Developments Share Price.

The acquisition of W Sentosa for SGD324m at 3.1% NPI yield/ SGD1.35m per key from its sponsor is in line with the market and should partially offset lower distributions due to its Novotel Clarke Quay divestment.
With this purchase, CDL Hospitality Trusts' 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 (~840 rooms in 2019) but Singapore’s on-going leisure tourism initiatives should support longer-term growth prospects.
Management expects a +0.9% DPU accretion on a standalone basis for the deal, assuming a fully debt-funded transaction (at 2.44% funding cost). See CDL Hospitality Trust Dividend History.
On a standalone basis, CDL Hospitality Trusts’s leverage would rise from 36.3% to 42.3%, but improves to 35.3% following the Novotel Clarke Quay divestment. This leaves SGD512.7m in debt headroom, at a 45% leverage limit.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-11-21

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