Singapore Property - DBS Research 2019-11-22: Liang Court ~ Renewed Lease Of Life


Singapore Property - Liang Court ~ Renewed Lease Of Life

1. Redevelopment of Liang Court integrated development is a four-way win.

Liang Court to be redeveloped.

  • CITY DEVELOPMENTS LIMITED (SGX:C09) and its partner, CAPITALAND LIMITED (SGX:C31) will jointly redevelop the current Liang Court integrated development via a 50:50 JV. Upon completion, the JV will own the residential and commercial components while ASCOTT RESIDENCE TRUST (SGX:A68U) will own the 192-unit serviced residence with a hotel license, and CDL HOSPITALITY TRUSTS (SGX:J85) have the option to acquire a stake in the newly developed hotel which will have between 460-475 rooms.
  • Along with the redevelopment, the JV plans to rejuvenate the river promenade flanking the property which is in line with URA’s Draft Master Plan 2019 to enhance the area’s vibrancy. This is expected to generate social activities around the proposed integrated development, increase footfall and improve pedestrian accessibility along the Singapore River.

Residential and commercial components to be owned by JV.

  • The JV will redevelop the entire site into an integrated development with a GFA of 100,263 sqm. The hotel and serviced residence components will be owned by CDL HOSPITALITY TRUSTS and ASCOTT RESIDENCE TRUST respectively, while the JV will maintain ownership of the 700-unit residential towers and commercial component (GFA of 11,530 sqm.). The land has a remaining leasehold of 57 years, and the JV has obtained in-principle approval for the land lease to be topped up to a fresh 99-year lease, which we estimate would cost around S$350m. The proposed integrated development is within the Clarke Quay entertainment precinct and is close to Fort Canning MRT Station.

Tapping on the partnership’s synergies.

  • This will be yet another collaboration between CITY DEVELOPMENTS LIMITED and CAPITALAND, after the successful launch of the mixed-used development of Sengkang Grand Residences. As of 2 November 2019, 235 out of the 680 residential units have been sold.
  • The rejuvenation of the Liang Court precinct will compliment and create synergies as both developers already own surrounding properties within the vicinity. CITY DEVELOPMENTS LIMITED owns Central Mall, an office-cum-retail integrated development along Magazine Road, while CapitaLand has a stake in Clarke Quay mall – housed within five blocks of conserved shophouses – through CAPITALAND MALL TRUST (SGX:C38U) and a stake in Park Hotel Clarke Quay through ASCOTT RESIDENCE TRUST.

Four-way win.

  • The developers however, stands to gain higher returns through inheriting precious land-bank within the heart of the city. At an estimated land cost of c.S$1,000 psf (or all-in cost estimated at S$1,400 psf including top-up premium to 99-year lease), we believe the price is attractive and unattainable when compared to prices at recent government land sales (GLS) for sites within the city. The estimated end value of S$2.9bn for the completed redevelopment represents an attractive return of close to 30% for the project.

2. CDL Hospitality Trust (CDLHT): Trading up to a W Hotel

Divestment of Novotel Clarke Quay (“NCQ”).

  • CDL HOSPITALITY TRUSTS will divest NCQ for S$375.9m, resulting in a S$36.6m gain or 12.9% over its latest valuation. This translates to an exit yield of 5.6% for NCQ. NCQ currently has 403 rooms, ADR of c.$$240, and average occupancy above c.90%. The divestment is expected to be completed by April 2020.

Forward purchase of new hotel operated by the Marriott brand.

  • Concurrently, CDL HOSPITALITY TRUSTS has entered into an agreement with the JV to purchase the new hotel when completed in c.2025. The new hotel will be operated by Moxy Hotels, an upper midscale hotel owned by Marriott International Inc. The forward purchase price will be the lower of S$475m or 110% of development costs. This protects CDL HOSPITALITY TRUSTS against any potential cost overruns from the entire integrated development.
  • Based on the price cap of S$475m, the 460-475 room Moxy Hotel will be purchased based on 5.6% stabilised NPI yield. The operator has guaranteed a step-up in revenues over three years once the new hotel is completed. Initial yield for the new hotel will be approximately 2.5-3.0%, and gradually stabilising at 5.6% by the third year. This is based on the assumption that ADR and occupancy rates remain relatively the same as NCQ (factoring in 1% inflation throughout).
  • Moxy Hotels has agreed on a 20-year Hotel Management Agreement commencing on the completion date of the new hotel. Similar with terms to CDL HOSPITALITY TRUSTS’s other hotel management agreements, CDL HOSPITALITY TRUSTS has entered into a license and royalty agreement for the use of the Marriott trademarks for the new hotel. Moxy Hotel’s income will be predominantly from hotel rooms and F&B offerings, accounting for c. 80% and c.10% of revenues respectively.

Stepping into the luxury Sentosa Island segment.

  • To mitigate for the loss of income from NCQ during the redevelopment phase, CDL HOSPITALITY TRUSTS has acquired W Singapore – Sentosa for S$324m. This translates to an NPI yield of 3.1% based on RevPAR of c.S$318 for 9M19 has room to run in our view. The transaction is expected to complete in early-2020.
  • W Hotel consists of 240 rooms, 3 F&B outlets and 1 poolside bar. With average occupancy of 76% in FY18, we believe there are potential RevPAR upside with the S$4.5bn expansion of Resorts World Sentosa and transformation of Sentosa Island. The lower occupancy recorded in FY18 was in part due to the opening of the 606-room Village Hotel Sentosa (owned by FAR EAST HOSPITALITY TRUST (SGX:Q5T)) during the year.

Managing earnings while trading up.

  • Both transactions would be DPU accretive on a combined or stand-alone basis. The divestment of NCQ and the subsequent purchase of the new Moxy hotel (funded by CDL HOSPITALITY TRUSTS’s debt headroom of S$512.7m) would be c.2.0% DPU accretive. The acquisition of W Hotel would be 0.9% DPU accretive. On a combined basis, these transactions would create an overall 2.7% accretion to CDL HOSPITALITY TRUSTS DPU in the medium term.
  • Although the income from of W Hotel will help to mitigate the loss of income from NCQ, there is still an a near term earnings void. We believe the Manager can disburse divestment gains to stabilise DPU while on the hunt for more accretive acquisitions.
  • We view the transactions positively because;
    1. CDL HOSPITALITY TRUSTS will not undertake any development risks on the new hotel;
    2. part of the S$36.6m divestment gains will be deployed to help stabilise DPU;
    3. payment of S$475m for Moxy Hotel will only commence after TOP (5% at TOP, 90% at completion, 5% thereafter);
    4. gearing will fall to 35.3% after the divestment of NCQ and acquisition of W Hotel, leaving CDL HOSPITALITY TRUSTS with a debt headroom of S$512.7m to potentially look for further acquisitions to boost earnings.

3. Ascott Residence Trust – taking part in the future Somerset Liang Court

Partial sale of Somerset Liang Court.

  • ASCOTT RESIDENCE TRUST will be divesting 15,170 sqm of GFA for S$163.3m. This represents a 44% premium or S$84.3m net gain for the portion of GFA sold in Somerset Liang Court (c.54% of total GFA). The retained portion representing GFA of 13,034 sqm will be redeveloped into a 192-unit serviced residence with a hotel licence.
  • Based on the disposal price, the exit yield works out to be c.3.5%. The completion of the divestment and execution of the joint development deed is expected to be done in April 2020.

Redeployment of divestment proceeds.

  • The majority of the net divestment proceeds (S$157.3m) will be used to fund the redevelopment and some portion will be distributed to unitholders to stabilise DPU. The redevelopment will also include a top-up of the site to a fresh 99-year lease. When completed in 2H2024, the new Somerset-branded serviced residence (“NSR”) is projected to be valued at c.S$300m, representing S$42.8m fair value gain on the retained GFA.
  • The divestment gain and projected future fair value gain will result in total net gain of c.S$84.3m for ASCOTT RESIDENCE TRUST.

Merits of redevelopment.

  • After a stabilisation period of 2-3 years, NSR is projected to generate an EBITDA yield of 4%. Moreover, the current serviced residence is more than 35 years old and may eventually be required to undergo an asset enhancement programme.
  • Somerset Liang Court currently enjoys occupancy of c.85% and ADR of S$300. Based on the assumption that occupancy level and ADR for NSR will remain relatively similar, we project EBITDA yield should be around 4% post redevelopment. In addition, a hotel licence will be issued to NSR, and this would give ASCOTT RESIDENCE TRUST the flexibility to take in short stays.

Divestment proceeds to stabilise DPU.

  • Some portion of the divestment proceeds will be distributed to unitholders to stabilise DPU during the four-year development phase.
  • Based on S$600-700 psf development cost (c.S$100m total), there should be sufficient funds for land lease top-up, as well as distributions to unitholders to stabilise DPU. We estimate the loss of income from Somerset Liang Court will reduce pro forma FY2018 distributable income by c.$7.2m (or c.4.6%).

Upsized firepower by end-2019.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-11-22
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