• CDL Hospitality Trusts (SGX:J85) is divesting Novotel Brisbane for S$66.4m. The exit yield of 7.3% appears high, but yield based on underlying performance is much lower.
• We think this is a good move amid uncertainties surrounding COVID-19, the strong competition in Brisbane, and an expiring master lease in Apr 2021.
• Reiterate ADD. CDL Hospitality Trusts is currently trading at 0.7x FY20 P/BV, which has priced in about 20% asset devaluation.

Divesting Novotel Brisbane

• CDL Hospitality Trusts announced that it entered into a sales and purchase agreement with ADFA Brisbane Pty Ltd, an independent third party to divest Novotel Brisbane for A$67.9m (S$66.4m). The divestment consideration is 6.9% above the independent valuation of A$67.5m.
• While it is at a 7% discount to the property’s book value of A$73m on 31 Dec 2019, the valuation does not take into account the impact of COVID-19 on the property’s performance. The exit yield works out to be 7.3%, and the property value of A$67.9m is 7.5% lower vs. pre-COVID-19.

A Good Move Amid Uncertainties

• While an exit yield of 7.3% appears relatively high, we understand that the yield based on the property’s underlying performance would be much lower. While CDL Hospitality Trusts has been enjoying recurring fixed rent and good rental yield of 7.8%, the property’s underlying performance was affected by strong supply in the past few years.
• According to Colliers, due to the strong supply, Brisbane’s hotel occupancy and average daily rate declined from 2012 to 2015 before stabilising from 2016. Brisbane is still facing challenges from COVID-19 and more supply will be coming onstream in the next few years. The disposal came at an opportune time as the fixed rent lease will expire in Apr 2021, which we think is unlikely to be renewed on a fixed rent basis.
• The buyer is a reputable Thai hotel chain, which already has a presence in Australia and is likely to operate the hotel under its own brand name. Aside from the hotel’s strategic location, we believe that the expiring master lease could be one of the factors adding to the hotel’s appeal.

Stronger Balance Sheet Provides More Flexibility

• The proceeds from the divestment will be used to pare down debt or fund acquisitions. Part of the proceeds may also be used to make distributions to mitigate the effect of divestment. Assuming proceeds will be used to pare down debt, gearing will be reduced from 35.4% to 34.1%.
• Post-divestment, CDL Hospitality Trusts' proforma DPU for FY19 will be reduced by 1.9% to 8.85 Scts. CDL Hospitality Trusts expects the divestment to be completed on 30 Oct 2020.

Reiterate ADD on CDL Hospitality Trusts With An Unchanged DDM-based Target Price

• We reiterate our ADD call on CDL Hospitality Trusts. While the outlook remains uncertain with patches of good and negative news, CDL Hospitality Trusts share price is currently trading at 0.7x FY20 P/BV, which has priced in about 20% asset devaluation.
• Re-rating catalysts/downside risks include sooner/slower-than-expected distribution of vaccines.

Source: CGS-CIMB Research - 21 Oct 2020