• Maiden acquisition in Italy of 95% interest in Hotel Cerretani Florence for EUR40.6m at 4.6% NPI yield. 
• 1% DPU accretion but upside from higher room rates as the extensive refurbishment was only done in 2016. 
• Expect further acquisitions in Europe ahead given modest 35% gearing post Florence acquisition. 

Attractive Value

• We maintain our BUY call on CDL Hospitality Trusts (CDREIT) with a Target Price of S$1.85.
• While CDREIT’s results disappointed over the last two quarters, we believe the projected recovery in the overall Singapore hospitality market, with revenue per available room (RevPAR) growth of 3-5% p.a. over the next few years should drive CDREIT’s share price higher. This, combined with CDREIT’s recent acquisitions, should result in DPU CAGR of 3% between 2017-2020.
• Moreover, CDREIT’s yield is based on a 90% payout ratio versus its peers which typically have a 100% payout ratio.

Where We Differ: Should Trade at a Higher Premium to Book

• Consensus has a lower target price at S$1.75. This implies CDREIT’s Singapore portfolio is valued at S$700,000 per key, below asking prices for hotels in Singapore which are in excess of S$1m per key.
• With a potential upturn in the Singapore market over the next three years, this is too conservative in our view. Thus, given the quality of its properties, CDREIT should re-rate closer to our Target Price which implies price per key of S$800,000 or 1.2x P/B.

Upside From Acquisitions

• Going forward, we expect future accretive acquisitions to act as a re-rating catalyst. This follows the recent DPU accretive acquisition of a hotel in Florence.

Valuation

• We maintain DCF-based Target Price of S$1.85. With over 24% capital upside we retain our BUY call.

Key Risks to Our View

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

What's New - Maiden Acquisition in Italy

Acquires Florence hotel for EUR40.6m

• CDREIT announced its maiden acquisition in Italy, with the acquisition of a 95% interest in Hotel Cerretani Florence, MGallery by Sofitel, for EUR40.6m (S$63.6m). This translates to an annualised NPI yield of 4.6% for the nine months ended 30 September 2018 or EUR497k (S$778k) per key.
• The property will be leased and operated by the existing lessee, FC Operations Hotel SRL which is affiliated to EVENT Hotels, for 20 years commencing from the date of completion (late November). EVENT Hotels is the largest fully integrated hotel management platform in Germany which owns, operates and manages more than 80 hotels with 14,100 keys throughout Europe.
• Under the lease structure, CDREIT will receive 93% of net operating profit subject to a base rent of EUR1.3m (S$2m)
• The property is expected to be funded through a three-year facility with an interest rate of 0.7%.

Hotel overview

• The 4-star 86 room freehold property is under the “MGallery by Sofitel” brand and completed an extensive refurbishment programme in 2016 for EUR5.3m.
• The hotel is within walking distance to many of Florence’s key attractions including Cathedral of Santa Maria del Fiore (II Duomo), Ponte Vecchio, Galleria dell’Accademia, and the Uffizi Gallery.
• We understand the properties’ revenue per available room (RevPAR) is around EUR150 with occupancy in the mid to high 70’s.
• Near term there is 6.5% cumulative increase in new room supply over the couple of years. However, with restricted supply in the inner part of Florence, due to expected growth in demand, CDREIT expects to improve room rates to EUR210-220 from EUR190 currently.
• Growth in demand is expected to be driven by Chinese visitors who only represent 12% of total tourists to Florence. For the property itself, 65% of guests are non-Italian predominantly from the US, UK, France and Germany. Furthermore, as the property is relatively small, CDREIT believes occupancy for the property can stabilise at around the 80% level in the medium term.
• In term of seasonality, we understand peak occupancy typically occurs in the third quarter at around the 90% level with a seasonal lull in the colder months of December, January and February.

Our Thoughts

• The acquisition of the property is not unexpected given the attractive yield spreads on offer in Europe owing to the low funding costs. Furthermore, the market has been waiting for CDREIT to redeploy the A$77m (S$77m) proceeds from the sale of Mercure and Ibis Brisbane in January this year (exit yield of 5.3% on fixed rental), which thus far has been used to repay its more expensive borrowings.
• We believe the market should react positively to this acquisition, given the expected 1% accretion to FY19- 20F DPU despite gearing marginally increasing to 35% from 34% at end September.
• While some investors may question the “tight” NPI yield for the Florence hotel and buying an asset with a lower yield that that of the recently sold Brisbane hotels, we understand the NPI yield is consistent with recent transactions and the effective yield spread (NPI yield less borrowing costs) of the Florence property is higher at 3.9% versus 1.3% for the Brisbane hotels.
• With 24% upside to our Target Price of S$1.85, we maintain our BUY call. We continue to be bullish on CDREIT’s prospects given the leverage to the multi-year recovery in the Singapore market. Further upside would also come from further acquisitions which we understand REIT is actively pursuing.

Source: DBS Research - 19 Nov 2018