• Maintain BUY and SGD1.78 Target Price, 12% upside plus 6% yield. CDL Hospitality Trusts remains our S-REIT (hospitality) Top Pick.
• Its redevelopment plans for Novotel Singapore Clarke Quay (NCQ) are a positive step as it should provide the much-needed facelift and rebranding to the ageing asset, with minimal capex outlay during redevelopment. While W Hotel Singapore Sentosa (WSS)’s entry yields are on the lower end, we see mid-term potential from Greater Southern Waterfront (GSW) redevelopment and rising tourism numbers.
• With Singapore’s hospitality sector on an uptrend, we believe current valuation at 1x P/BV is attractive.

Redevelopment of Novotel Singapore Clarke Quay (NCQ)

• CDL HOSPITALITY TRUSTS (SGX:J85) announced the proposed redevelopment of Novotel Singapore Clarke Quay (NCQ), by which it will divest the hotel for SGD376m (c.SGD933,000/room key) and forward purchase the new hotel to be built on the site for a maximum price of SGD475m or SGD1m/key. See CDL Hospitality Trusts Announcements.
• The hotel redevelopment, along with neighbouring Liang Court site, is expected to be completed by 2025 and will be operated under the Marriot (Moxy hotels) brand. The exit (pro-forma) and entry NPI yields (stabilised) are expected to be 5.6% – higher than its current hotel cap rates of 4.25-4.75%.
• The proposed transaction is positive as it helps to rejuvenate an old asset into a higher-end hotel with a fresh 99-year lease term (currently 57 years), eliminates higher capex needed to maintain the ageing asset, and benefit from the increased vibrancy in the Liang Court area with the acquisition price to be paid only upon completion.
• CDL Hospitality Trusts will realise a SGD36m gain from the divestment – a portion of which is expected to be used for income top-up.

Acquisition of W Hotel Singapore Sentosa (WSS)

• In conjunction with the divestment, CDL Hospitality Trusts also announced that it will purchase W Hotel Singapore Sentosa (WSS) from its sponsor at SGD324m or SGD1.35m/room key. The acquisition NPI yield (pro-forma) of 3.1% is on the lower side in our view, but management noted that it is in line with recent transactions.
• While we are slightly concerned over the impact of micro-market supply increase that came on stream this year, the asset offers mid-term potential from the Greater Southern Waterfront (GWS) redevelopment plans.
• The above transactions are DPS accretive (pro-forma FY18) on a standalone and combined basis. The deals are subjected to unitholder approval and expected to be completed by 1Q20.

More Acquisitions Likely in the Near Term

• The acquisition of WSS will be funded from the divestment proceeds and debt. As CDL Hospitality Trusts is not expected to make any payment until completion for NCQ, the gearing is expected to drop to 35.3% (from 36.3%). This provides SGD250m headroom (assuming 40% levels) for acquisitions.
• Management noted that it will be aggressively looking for more acquisitions within Singapore (potentially M social from its sponsor) as well as European cities, being its preferred markets.

DP and TP Adjustments

• We revise our FY19F-21F DPU by 0% to -2% factoring in the above transactions and capital top-up of SGD10m pa. See CDL Hospitality Trusts Share Price; CDL Hospitality Trusts Target Price; CDL Hospitality Trusts Dividend History.

Source: RHB Invest Research - 22 Nov 2019