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CDL Hospitality Trusts: Unlocking Value Of Asset In Prime Location

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About: CDL Hospitality Trusts (CDHSF)
by: The Value Pendulum
The Value Pendulum
Deep Value, growth at reasonable price, contrarian, micro-cap
Summary

A proposal to redevelop a prime site leads to a series of value-accretive transactions for CDL Hospitality Trusts.

The proposed transactions increase CDL Hospitality Trusts' geographical exposure to its home market, Singapore, and allow the trust to enter the growing lifestyle hotel market.

CDL Hospitality Trusts has sufficient debt headroom to finance future acquisitions to make up for the loss of income associated with the divestment of the Clarke Quay hotel.

CDL Hospitality Trusts trades at 1.11 times P/B and offers a consensus forward FY2020 distribution yields of 5.7%.

Elevator Pitch

Singapore-listed hospitality trust CDL Hospitality Trusts (OTC:CDHSF) (OTC:CDHSY) [CDREIT:SP] trades at 1.11 times P/B, which is on par with its long-term historical P/B average of approximately 1.1 times P/B since the trust's listing in 2006. The trust also offers a consensus forward FY2020 distribution yields of 5.7%, which is below the trust's long-term historical average distribution yield of approximately 6.7% since its listing in 2006.

I assign a "Neutral" rating to CDL Hospitality Trusts. While I am positive on the pro-forma DPU (Distribution Per Unit) accretion associated with trust's proposed divestment of its hotel in Clarke Quay, Singapore, and the acquisition of two new hotels, the income vacuum due to the divestment could pose downside risks to CDL Hospitality Trusts' payouts in the near-term. A positive re-rating catalyst for the trust will be further DPU-accretive acquisitions leveraging on its debt headroom, which would make up for the loss of income from the Clarke Quay hotel sale.

Readers are advised to trade in CDL Hospitality Trust units listed on the Singapore Stock Exchange with the ticker CDREIT:SP where average daily trading value for the past three months is close to $3 million and market capitalization is above $1.4 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers (IBKR), Fidelity, Charles Schwab (SCHW), or local brokers operating in their respective domestic markets.

Trust Description

Listed on the Singapore Stock Exchange in July 2006, CDL Hospitality Trusts is a hospitality trust that owns 16 hotels and two resorts comprising a total of 5,088 rooms, and a retail mall as of September 30, 2019 with a total asset valuation of S$2.8 billion. CDL Hospitality Trusts' parent is Singapore-listed property developer City Developments (OTCPK:CDEVF) (OTCPK:CDEVY) [CIT:SP], while its sponsor is global hotel group Millennium & Copthorne Hotels Limited.

List Of CDL Hospitality Trusts' Properties As Of September 30, 2019

Source: CDL Hospitality Trusts' 3Q2019 Results Presentation

Breakdown Of CDL Hospitality Trusts' Portfolio Valuation As At December 31, 2018

Source: CDL Hospitality Trusts' 3Q2019 Results Presentation

Breakdown Of 9M2019 Portfolio Net Property Income By Country

Source: CDL Hospitality Trusts' 3Q2019 Results Presentation

I will be focusing primarily on CDL Hospitality Trusts' Singapore properties for the purpose of this article, as they account for over 60% of the trust's portfolio valuation and net property income.

Redevelopment Of Prime Site Leads To A Series Of Value-Accretive Transactions For The Trust

It was announced on November 21, 2019 that a consortium led by CDL Hospitality Trusts' parent City Developments and another Singapore-listed property developer CapitaLand Limited (OTCPK:CLLDF) (OTCPK:CLLDY) [CAPL:SP], plans to re-develop a prime site (the Liang Court shopping mall site) in Clarke Quay (well-known nightlife destination), into an integrated development comprising a new 460-475 room hotel, two residential towers (700 units), a commercial component (124,000 sq ft), and a 192-unit serviced residence with a Gross Floor Area or GFA of over 100,000 sq m. The Liang Court shopping mall was first opened in 1984, more than three decades ago, and there have been no new developments on the site since then. One of CDL Hospitality Trusts' current six Singapore hotels, Novotel Singapore Clarke Quay or NCQ, sits on the prime Liang Court site.

Liang Court Site And Its Prime Location

Source: CDL Hospitality Trusts' Investor Presentation dated November 21, 2019

As part of the redevelopment transaction, CDL Hospitality Trusts will divest its entire stake in Novotel Singapore Clarke Quay to the two property developers, City Developments and CapitaLand, and CDL Hospitality Trusts will acquire the new hotel to be built on the same site from its parent City Developments (which will develop the new hotel) in a forward purchase transaction. Separately, CDL Hospitality Trusts will also acquire another new hotel located in Sentosa (island resort off Singapore’s southern coast) referred to as W Hotel Singapore Sentosa from City Developments as well to partially mitigate the loss in net property income contribution associated with the sale of Novotel Singapore Clarke Quay.

Novotel Singapore Clarke Quay is a 403-room mid-scale hotel managed by AccorHotels with 57 years remaining on its land lease, and it will be sold for S$375.9 million implying a price per key of S$933,000 or a net property income yield of 5.6%. Also, the value of the asset located in a prime location is unlocked, with the divestment price of S$375.9 million, being 87% higher than CDL Hospitality Trusts' initial acquisition price of S$201.0 million in 2007.

In the place of Novotel Singapore Clarke Quay, a new 460-475 room upper mid-scale hotel managed by Marriott International (MAR) called Moxy Singapore Clarke Quay will be built on the same Liang Court site. CDL Hospitality Trusts will forward purchase Moxy Singapore Clarke Quay at the lower of fixed price of S$475 million or 110% of development costs. The price cap of S$475 million for the acquisition of Moxy Singapore Clarke Quay is equivalent to a price per key of S$1 million or a net property income yield of 5.6% (same as the net property income yield for the divestment of Novotel Singapore Clarke Quay).

To make up for the loss of income from Novotel Singapore Clarke Quay during the five-year construction period for the new Moxy Singapore Clarke Quay, CDL Hospitality Trusts is purchasing a 240-room luxury hotel W Hotel Singapore Sentosa (also managed by Marriott) located with 86 years remaining on its land lease from its parent City Developments. The acquisition price for W Hotel Singapore Sentosa is S$324 million, implying a price per key of S$1.35 million or a net property income yield of 3.1%.

In terms of transaction time line, extraordinary general meetings to seek shareholders' and unit holders' approval for the redevelopment transaction are expected to take place in January 2020. If the redevelopment transaction is approved, Novotel Singapore Clarke Quay will cease operations in early April 2020, and the divestment of this Singapore hotel will be completed by end-April 2020. The new hotel built on the same Liang Court site, Moxy Singapore Clarke Quay, is expected to be acquired and be open for business in 2025. The completion of the acquisition of W Hotel Singapore Sentosa is expected to take place in early 2020.

The series of transactions that CDL Hospitality Trusts is undertaking is value-accretive and will result in a combined pro-forma DPU (Distribution Per Unit) accretion of approximately +2.7% on a stabilized basis. There is likely to be an income vacuum associated with the divestment of Novotel Singapore Clarke Quay in the next five years, which could be partially offset by the acquisition of W Hotel Singapore Sentosa and a potential distribution of divestment gains.

Strategic Benefits Of Proposed Transactions

While the proposed transactions outlined in the preceding section are financially sound with respect to DPU accretion and the acquisition & divestment prices of the properties, it is even more important to look at the strategic benefits associated with the proposed transactions.

Firstly, the proposed transactions increase CDL Hospitality Trusts' geographical exposure to its home market, Singapore. Singapore, as a proportion of the trust's portfolio valuation increases from 62% to 68% on a pro-forma basis, while CDL Hospitality Trusts' net property income contribution from Singapore increases from 60% to 64%.

Maintaining a majority of its portfolio valuation and net property income derived from its Singapore home market should be positive for CDL Hospitality Trusts, as there could be a potential discount assigned to Singapore-listed REITs with a higher level of foreign asset exposure due to foreign exchange volatility and unfamiliarity with the dynamics of overseas hospitality markets.

Furthermore, the medium to long term prospects of Singapore's hospitality market look promising. Based on a combination of research from CDL Hospitality Trusts, Horwath HTL and Singapore Tourism Board, new hotel room supply CAGR for the 2019-2022 period is expected to be low at +1.3%. Notwithstanding weak global economic growth now, Singapore does have significant large-scale tourism projects in the pipeline which could boost hotel demand over a longer period in the future.

Singapore's Planned Large-Scale Tourism Projects In The Pipeline

Source: CDL Hospitality Trusts' Investor Presentation dated November 21, 2019

Secondly, CDL Hospitality Trusts enters the lifestyle hotel market segment with the acquisition of W Hotel Singapore Sentosa and the forward purchase of Moxy Singapore Clarke Quay.

Moxy is an affordable luxury lifestyle boutique hotel concept developed by Marriott targeted at next-generation travelers and millennials. Moxy Singapore Clarke Quay will be built with a rooftop bar, an open social floor, a rooftop pool and gym. In particular, the highlight is the open social floor comprising a restaurant, flexible meeting space and a bar, which allow hotel guests to mingle freely with each other.

On the other hand, W Hotels, a luxury lifestyle hotel brand also created by Marriott, is known for its world-class service, cutting-edge design, and the integration of retail & restaurant concepts and entertainment experiences, which are appealing to leisure travelers seeking out differentiated hotels. W Hotel Singapore Sentosa boasts panoramic views of the waterway and marina; and there are currently works in place to upgrade the food & beverage outlets at the hotel.

A Knight Frank report on the U.K. hotel sector highlights that there has been a 18.5% CAGR in lifestyle hotel rooms in the U.K. between 2000 and 2019, which it attributes to the "clear correlation between growth in millennial spending power and the proliferation of lifestyle brands."

Sufficient Debt Headroom For Further Acquisitions

The key downside risk for CDL Hospitality Trusts is the income vacuum and potential decline in distribution payout resulting from the divestment of Novotel Singapore Clarke Quay. While this could be partially offset by the acquisition of W Hotel Singapore Sentosa and a potential distribution of divestment gains, further DPU-acquisitions to make up for the loss of income from Novotel Singapore Clarke Quay will be a positive catalyst.

The thing in CDL Hospitality Trusts' favor is that the trust does not have to make payments for the acquisition of Moxy Singapore Clarke Quay till 2025, when the Temporary Occupation Permit for the hotel is expected to be issued. As a result, CDL Hospitality Trusts' pro-forma gearing, after taking into the account the divestment of Novotel Singapore Clarke Quay and the acquisition of W Hotel Singapore Sentosa, is estimated to be 35.3%, compared with its gearing of 36.3% as of September 30, 2019.

Assuming a gearing of 45%, the statutory limit for Singapore-listed REIT, CDL Hospitality Trusts has a debt headroom of approximately S$512.7 million for future acquisitions. Assuming a lower target gearing of 40%, the trust's debt headroom would be lower at approximately S$250 million. Possible acquisition targets include M Social Singapore owned by its sponsor Millennium & Copthorne Hotels Limited, and hotels in Europe.

Valuation

CDL Hospitality Trusts trades at 1.11 times P/B based on its net asset value per unit of S$1.46 and its unit price of S$1.62 as of December 2, 2019. This is on par with its long-term historical P/B average of approximately 1.1 times P/B since the trust's listing in 2006.

CDL Hospitality Trusts offers consensus forward FY2019 and FY2020 distribution yields of 5.5% and 5.7% respectively, which is below the trust's long-term historical average distribution yield of approximately 6.7% since its listing in 2006.

Singapore-listed Hospitality REIT Peer Comparison

REIT P/B Consensus Forward FY2019 Distribution Yield Consensus Forward FY2020 Distribution Yield
Far East Hospitality Trust (OTC:FHOSY) [FEHT:SP] 0.86 5.3% 5.6%
Frasers Hospitality Trust [FHT:SP] 0.97 6.2% 6.5%

Source: Author

Note that Singapore hospitality REITs Ascott Residence Trust [ART:SP] and Ascendas Hospitality Trust [ASCHT:SP] are excluded from the peer comparison above, as they are in the midst of a merger which is expected to be completed by the end of the year.

Variant View

The key risk factors for CDL Hospitality Trusts are weaker-than-expected global economic growth which affects tourism demand, a larger-than-expected increase in the future supply of new hotel rooms in Singapore and other markets which the trust operates in, a spike in interest rates which adversely affects the trust's valuation (via a higher capitalization rate) and cost of debt, and overpaying for future acquisitions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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