Positioning for the Longer Term, BUY, Top Pick

• 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.
• 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.
• 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%).

Divests Novotel Clarke Quay, Forward Purchases New Hotel at 5.6% Stabilised Yield

• 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.

Acquires W Sentosa at 3.1% NPI Yield

• 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).
• 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.

Source: Maybank Kim Eng Research - 21 Nov 2019