CDL HOSPITALITY TRUSTS (SGX:J85)
CDL Hospitality Trusts - Welcoming Maiden Residential Built-To-Suit Development
- Deal to forward-fund greenfield development in Manchester at S$136m.
- Asset will be a freehold residential build-to-suit building with 352 rooms; completion expected in May’24.
- Acquisition NPI yield estimated at 5.0%, a good ~1ppt below market transaction rates, leaving valuation upside.
- Strong demand dynamics with booming employment force and reduced housing affordability.
- Maintain BUY with target price of S$1.35.
Building blocks for a brighter future
- CDL Hospitality Trusts announced its maiden investment in the long-stay lodging segment; this follows the recent revision of its investment mandate.
- The deal will involve forward-funding by CDL Hospitality Trusts on a greenfield development in Manchester, that will be completed around May’24.
- The property will be known as “The Castings”, a residential built-to-rent building situated in Manchester UK.
- Acquisition price is fixed at £73.3m (S$136.0m), with a discount on forward valuations of £76.1m (S$141.3m).
- NPI yield of the acquisition is estimated at 5.0-5.1% on stabilised levels and accretion is expected to be 2.2% on proforma FY20 DPS.
- Consideration will be paid in stages over the development period, including:
- £9.5m (S$17.6m) to acquire the development land – expected this year;
- £58.2m (S$108.1m) construction funding to be paid periodically over the development period;
- and the remaining £5.6m (S$10.4m) post practical completion of the building
- The project vendor is a joint venture between FREOF V and Packaged Living, which is backed by Fiera Real Estate, a commercial development managing over US$5.3bn worth of assets.
“The Casting” – Residential build-to-rent building in Manchester
- “The Casting” is a freehold build-to-rent building in Manchester with a total residential floor area of ~219.6k sqft.
- The BTR will offer a mix of studios, one-bedroom units, three-bedroom units and mostly two-bedroom units for long-stay periods exceeding one year.
- Residences will be able to utilise shared common amenities, including a gym, a cinema, a resident lounge and a roof terrace. There will also be ground floor retail spaces catered for residents’ needs, spanning 17.3k sqft.
- The freehold 352-unit BTR block will comprise a mix of studios, one-, two-and three-bedroom units, with a total residential floor area of approximately 219,600 sqft. The New Property will also comprise internal and external common amenity spaces, which may include a gym, a cinema, resident lounge areas, a roof terrace and ground floor retail spaces (subject to final design and changes), spanning approximately 17,300 sqft. (this para is a repetition of the above paras)
First-mover advantage in a vibrant neighbourhood undergoing rejuvenation
- The BTR will be situated in Piccadilly East, a neighbourhood that is 2km away from the Manchester CBD.
- The property is a 9-minute walk from Manchester Piccadilly station, and has direct access to airport and major cities in the UK.
- In the longer-term horizon, the precinct will be prominently uplifted when the upcoming HS2 is operational in 2035-2040, to allow high-speed connectivity between Manchester and key cities such as London with travel time reduced by half.
- We understand that there are a number of properties undergoing development/redevelopment in the submarket, but none that are in direct competition with the “The Castings” offering.
Our thoughts
A complementary asset class.
- The acquisition will be CDL Hospitality Trusts’s first within the longer-stay lodging segment, and has been the long-waited acquisition post Novotel Clarke Quay’s divestment last year. While we acknowledge that the income gap post Novotel Clarke Quay will likely stay with investors for a few more years, the asset offers exciting and promising opportunities for CDL Hospitality Trusts with complementary qualities against the current portfolio offerings that primarily consist of hotels which have been significantly impacted by the pandemic as travel borders were shut last year.
- As an investment, the BTR sector offers stability, in our view, and is an emerging asset class with overall market inventory making up only ~2% of residential rental stock with private landlords dominating most of the supply, in the face of strong demand from an ever-growing market of long-term renters, driving more investments in this space. The BTR is a superior product to typical buy-to-lease developments given its more curated offerings and amenities and given its stability and wider demand drivers. This complements CDL Hospitality Trusts’s predominantly hotel portfolio, where demand is more cyclical. Vendor Packaged Living also has a pipeline of over 4,000 BTR homes in the UK, leaving CDL Hospitality Trusts with future opportunities to expand its footprint within the BTR market.
Attractive yields with upside to NAVs.
- The development project offers a stabilised yield of ~5.1% which is at a good 100bps higher than current trading yields for income-producing assets within the residential lodging segment within the UK. Post completion, we see the potential for yield compression nearer to trading environment in the range of ~4.0–4.5%, which translates into upside in the range of ~10- 25% on valuation.
Stable and diversified demand drivers led by a boom in working population.
- Manchester is a major employment centre hub and the largest economic hub in the north of England. It is also home to the largest percentage of renter cohort (44% of population) within the UK – which comprises young adults between the age of 25 and 34. Apart from declining housing affordability with a house price-to-income ratio of 6.3x, there is also growing concerns on housing shortage within the city, potentially due to construction delays.
Key demand drivers will likely come from the young working population and students.
- According to JLL, the city has seen a 30.7% increase in employment growth overall since 2016, and an additional 7.7% growth from 2019- 2021. There are also over 100k students enrolled across five universities within Manchester.
- With the advent of work-from-home and virtual learning arrangements, and higher emphasis on the quality of housing and amenities to cultivate favourable work (from home) and life culture, “The Casting” should come as a solid choice for long-term renters.
Gearing to creep up to 42.3% assuming debt-funding.
- Post completion, pro forma gearing will increase to 42.3% as of 30 June 2021, from the current 39.1% should full debt be assumed for the transaction. Actual gearing, in our view will likely be lower than 42.3% as CDL Hospitality Trusts’s portfolio gets revalued higher to pre-COVID levels come year-end. Payments will likely be well-staggered throughout 2021-2024, with upfront funding needs limited at S$17.6m. This can sufficiently be paid off with cash on hand as the REIT has ample financial resources to debt fund this deal.
- As the project is expected to begin contributing earnings by May’24, we see attractive inorganic growth opportunities with the potential ~S$475m Moxy hotel acquisition in 2025 (part of Novotel Clarke Quay redevelopment deal) to drive upside in the medium term.
- See
- We currently have a BUY call on CDL Hospitality Trusts with target price of S$1.35.
Geraldine WONG
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2021-09-01
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