• CDL HOSPITALITY TRUSTS (SGX:J85) has entered into two transactions on:
  1. the redevelopment of Novotel CQ (and forward purchase of the new hotel), and
  2. W Singapore acquisition.
• On a combined basis, both transactions are expected to raise its Singapore portfolio valuation exposure to 68% (from 62%), and NPI exposure to 64% (from 60%). Together, the deals are also expected to translate to a 2.7% DPS accretion (on pro-forma FY18 basis).
• Maintain BUY with an unchanged target price of S$2.05.

What’s New

• The proposed transactions will include:
  1. Redevelopment transaction (involving the divestment of Novotel Singapore Clarke Quay, and forward purchase of a hotel as part of an integrated development, as well as
  2. the proposed acquisition of W Singapore – Sentosa Cove.

Proposed Redevelopment Transaction

• Unlocking S$36.3m in gains (12.9% of book value) on Novotel CQ property and the land, which comprises divestment gain (S$0.6m) and fair value gain (S$35.7m) accumulated over a 13-year period. The divestment consideration of S$375.9m represents a 87.0% premium (S$174.9m) over purchase price (S$201m) in 2007.
• The immediate valuation uplift between Novotel CQ as hotel use (S$333m as at 31 Dec 2018) is evident, as compared with latest residual land valuations by Colliers (S$368.7m) and Knight Frank (S$370.5m) factoring in the redevelopment potential. However, no redevelopment could happen prior to this, until consensus on the means to realise this potential is reached between the three subsidiary proprietors.
• Securing a brand new hotel with a refreshed 99-year lease (and avoiding significant capex obligations). The redevelopment transaction will allow CDL Hospitality Trusts to divest a 35-year-old Novotel CQ (ie first opened as The New Otani Singapore in Oct 84), which will require significant capital expenditure for replacement of plant, mechanical and electrical equipment, facade upgraders, and repairs, and major refurbishment to remain competitive. In exchange, CDL Hospitality Trusts will trade in for a hotel with a refreshed 99-year lease, at a time when cap rates are seeing compression (ie with recent transactions around 3%).
• Other benefits: Acquisition of a turnkey hotel (without development risk), and retaining its presence in prime Clarke Quay location. The acquisition allows CDL Hospitality Trusts to forward purchase the new property at a fixed price. The pricing formula is based on the lower of S$475m fixed price, or 110% of development costs. In total, new hotel acquisition cost is estimated at S$483.7m, comprising S$475m purchase consideration, acquisition fee to H-REIT Manager ( < S$3.6m), the new hotel OpCo consideration ( < S$3.1m), and other professional fees (c.S$2.1m). The transaction also allows CDL Hospitality Trusts to retain is presence in the prime location of Clarke Quay (one of the most visited areas in Singapore), which has limited available acquisition opportunities and high barriers to entry.
• Expected 2.0% DPU-yield accretion (based on pro-forma FY18). Based on net divestment proceeds (S$369.3m) and new hotel acquisition cost (S$483.7m), and assuming both transactions were completed on 1 Jan 18, the redevelopment transaction is expected to translate to a 2.0% DPS accretion for FY18. Management expects the hotel to ramp up over a three-year period (ie with NPI yield of 5.6% at stabilised levels).

Proposed W-hotel Acquisition

• Rare off-market opportunity to acquire a luxury lifestyle hotel in the Sentosa market. Management noted that opportunities to secure a comparable hotel are seldom available, as most Singapore hotel assets are tightly held. The W Hotel acquisition will allow CDL Hospitality Trusts to ride on demand growth, expected to be generated by various expansion initiatives at Sentosa Island and southern part of Singapore in the medium-to long term.
• Expected 0.9% DPU accretion (based on pro-forma FY18). Based on an estimated W Hotel acquisition cost (S$342.2m), the proposed acquisition is expected to contribute an NPI of S$10.1m (NPI yield: 3.1%).

Portfolio impact on a Combined Basis.

• Solidifies future exposure to Singapore hospitality segment. Post completion of the two transactions (on a pro-forma basis as at 31 Dec 18), management expects CDL Hospitality Trusts’s Singapore portfolio valuation exposure to grow to 68% (from 62%), and NPI exposure to grow to 64% (from 60%). The W Hotel acquisition is expected to preserve CDL Hospitality Trusts’s Singapore concentration post-divestment of NCQ (before the new hotel is ready in 2025). After both transactions, CDL Hospitality Trusts will have seven hotels (totalling more than 3,000 rooms) in Singapore.
• Expected 2.7% DPU yield accretion on a combined basis. This assumes both transactions are completed on 1 Jan 18, taking into account net divestment proceeds (S$369.3m), estimated W Hotel acquisition cost (S$483.7m), and total new acquisiton cost (S$483.7m).
• Allows efficient capital recycling. CDL Hospitality Trusts will not be obliged to make payments during development of the new hotel property, until its 2025 TOP. The net divestment proceeds (est. S$369.3m) can be recycled for any purposes, such as acquisition opportunities (eg W Hotel), repayment of existing debt, or even income support.
• Post divestment of Novotel CQ property and W Hotel acquisition (before the new hotel acquisition), CDL Hospitality Trusts is expected to have a pro-forma gearing of 35.3% (and S$512.7m in debt headroom before reaching the 45% limit).

Earnings Revision / Risk

• We maintain our existing earnings forecast, and will factor in any transactions closer to their completion dates.

Valuation / Recommendation

• Maintain BUY. Our target price of S$2.05 is based on DDM (required rate of return: 6.25%, terminal growth: 1.5%).

Share Price Catalyst

• Contributions from yield accretive acquisitions.
• Increased contributions from newly refurbished properties.

Source: UOB Kay Hian Research - 22 Nov 2019