CDL H-Trust – CIMB
Down Under acquisition
Acquires Australian portfolio for S$221m
Upgrade to Outperform from Underperform; target price raised to S$2.01 (from S$1.68). The manager of CDLHT has announced the acquisition of five Australian hotels for a purchase consideration of S$221m (A$175m) from Tourism Asset Holding. To be fully funded with debt, the portfolio will be leased and managed by The Accor Group at a net property yield of 8.4%. Our DPU estimates rise by 5-10% for FY10-12 after accounting for this acquisition. Accordingly, our DDM target price rises to S$2.01 (discount rate 8.7%) from S$1.68. CDLHT offers a prospected total return of 21% from a forward yield of 6.4% and projected price upside of 14%. We believe this is a convincing acquisition with potentially strong accretion to distributable income, good REVPAR upside, and a reliable tenant-cum-operator. We are impressed with the
manager’s ability to acquire at distress pricing and believe there could be more acquisitions this year. Upgrade to Outperform from Underperform.
Hotels in Brisbane and Perth CBDs. The purchase consists of three Brisbane and two Perth hotels: Novotel Brisbane, Mercure Brisbane, Ibis Brisbane, Mercure Perth and Ibis Perth. The five freehold properties have 1,139 rooms in total. They are 3.5- to 4.5-star hotels located in the Central Business Districts of both cities, well positioned to capture both business and leisure travellers. At a purchase price of A$175m (S$220.9m), price per key is about A$154,000, or a 66% discount to replacement cost.
Master lessee structure; operated by Accor. The portfolio will be leased and operated on a master lease structure by The Accor Group, an international hotel operator which operates about 4,000 hotels in 92 cities with over 470,000 rooms. The lease period is long at 11.3 years, expiring in 2021. Additionally, the lessee’s obligations are guaranteed by Accor SA, a BBB-rated entity by Standard & Poor’s, for the entire duration of the leases.
7.8% yields guaranteed. The rent to be paid to CDLHT consists of a guaranteed base rent of A$13.7m, and a variable component that is 10% of net operating profit in excess of the base rent. Based on FY09 revenue, the variable component is estimated at A$1m. This gives CDLHT an expected annual rental yield of 8.4%, of which the guaranteed base rental yield is 7.8%. Under a triple net lease arrangement, the lessee will bear property tax, insurance and maintenance costs. Tax leakage from Australian net income is estimated at 3%.
Hotel demand in Brisbane and Perth underpinned by tourism and infrastructure growth. Hotel demand in Brisbane and Perth looks set to grow over the medium term. In Brisbane, growth should be underpinned by limited room supply, a thriving tourism sector, a strong resource sector, and the government’s commitment to infrastructure spending. Fundamentals are equally strong in Perth. As the business hub for Western Australia, and a key global supplier of iron ore, crude oil and LNG, Perth’s hospitality sector is set to benefit from large private and public infrastructure spending which will include the A$43bn Gorgon project, one of the largest resource projects in Australia expected to create up to 10,000 jobs when construction starts in 2010. Projected REVPAR growth is 5% for Brisbane and 3.6% for Perth, below the annual REVPAR CAGRs of 8% (Brisbane) and 13.5% (Perth) respectively.
Fixed rent component of portfolio rises to 56% from 50%. In our opinion, the risk profile of CDLHT is still stable, as the addition of its Australian portfolio would increase the fixed rent component of CDLHT to 56% from 50%.
Funding 100% with debt, asset leverage rises to 30%. Management intends to fund the acquisition with debt, which would be 50% in A$ and 50% in S$. The REIT has in place a short-term multi-currency acquisition facility to complete this acquisition. Blended cost of debt for this facility is estimated at 5%. However, management expects to replace this with a longer-term and lower-cost facility in 2010. Options include an MTN programme put in place earlier, and convertible bonds. With this acquisition, asset leverage for CDLHT will rise from 19% to about 30%, way below the regulatory limit of 60% and still comfortable.
Valuation and recommendation
Strong underlying cash flows. We believe that the tenant Accor will be able to support rent to CDLHT given that the portfolio is supported by strong operating cash flows: EBITDA after furniture fixtures and equipment (FF&E) yield is 13.8%, significantly higher than the 8.4% projected rental yield accruing to CDLHT. Furthermore, rents to CDLHT make up 60% of the tenant’s EBITDA after deducting operator fees and provisions for FF&E.
Upgrade to Outperform from Underperform; target price raised to S$2.01 (from S$1.68). After accounting for this acquisition, our DPU estimates rise by 5-10% for FY10-12. Our DDM-derived target price rises to S$2.01 from S$1.68 (discount rate 8.7%). CDLHT offers a prospected total return of 21% from a forward yield of 6.4% and projected price upside of 14%. We believe this is a convincing acquisition with strong accretion to distributable income, good REVPAR upside, and a reliable tenantcum- operator. We are impressed with the manager’s ability to acquire at distress pricing and believe there could be more acquisitions this year. Upgrade to Outperform from Underperform.