Go with the leader

• Studio M Hotel will anchor trust’s position as leading hotelier in Singapore

• Strong tourism industry performance in Jan-Feb’11 bodes well for Singapore hospitality sector

• BUY Call, TP S$2.30 maintained

Studio M hotel will anchor CDL HT’s leading position in Singapore. CDL Hospitality Trust’s (“CDL HT”) proposed acquisition of 360-room Studio M hotel, at S$154m ($428k/key) is attractive in our view. The initial yield of 6.1% has more upside as channel checks revealed that Studio M’s rate has moved up c15% to S$200/night in recent months (from S$174/night in 2010) and we see further upside in 2011 given its strong occupancy levels. With 82% of earnings derived from its Singapore hotels, we forecast CDL HT to deliver a strong 13% organic earnings growth for FY11-12, more than S-REIT peers. The manager has called for an EGM to be held on the 29th April’11 and as this acquisition is an interested party transaction, the sponsor and related parties, will not be able to vote.

Industry’s sustained strong performance in first 2 months of 2011 bodes well for the trust. Singapore continues to see a record breaking 2m visitors in Jan-Feb’11. Looking ahead, arrival figures from Japan may weaken in March 2011 due to the Earthquake Disaster. As per our report titled “Winds of Change” issued on 29 Mar’11, we believe that emerging travel patterns post March 2011 could be in Singapore’s favor as Singapore is a viable alternative travel destination (with its 2 IRs) from visitors expected to delay visiting Japan over the coming months. Given the trust’s leading position as one of Singapore’s largest hotel owners, we believe it will stand to benefit from such a growing trend.

Maintain BUY and DDM-based TP of S$2.30. The group’s strong DPU growth profile is attractive plus low gearing of c26% post acquisition, which remains below management’s optimal level of c40%. Hence, the additional debt-funded acquisition headroom may be utilized for opportunistic ventures.

Increasing Singapore exposure

Proposes to buy Studio M for S$154m

Maintain Neutral and target price of S$2.14. CDLHT has entered into a conditional sale and purchase agreement with Republic Iconic Hotel (wholly-owned by its sponsor, M&C Hotels) to acquire the 360-room Studio M hotel in Robertson Quay for S$154m or S$428,000/key. The hotel will also be master-leased to the sponsor for 20 years on a fixed plus variable structure, for a guaranteed initial net yield of 6%, above CDLHT’s FY10 dividend yield of 5.2%. We are positive on this long-anticipated accretive deal. We fine-tune our estimates with no material changes to our DPU estimates or DDM target price (discount rate 8.6%). Despite our positive view, expectations have been priced in, we believe, and upside remains limited in the short term. Re-rating catalysts could include announcements of accretive acquisitions and stronger-than-anticipated REVPAR growth in 2011.

REVPAR of S$155. Studio M is a contemporary hotel comprising two wings with 360 rooms. Completed in mid-2010, it is located at 3 Nanson Road, in the Robertson Quay entertainment precinct. The hotel is a short distance from the CBD and close to other portfolio hotels including Grand Waterfront Copthorne and Copthorne Kings in the Havelock Road area, the stronghold of the sponsor. Occupancy is high at 88.9% with average room rates of S$174 in the six months of operation from Jun to Dec 10. This represents REVPAR of S$155/day. Room revenue contributed more than 90% to hotel revenue.

Lease structure improved to capture REVPAR upside. Studio M will come with: 1) a fixed rent component, set at S$5m for the first 10 years and adjusted every 10 years; and 2) a variable component comprising 30% of revenue and 20% of gross operating profit less fixed rent. With more than 90% of hotel revenue from rooms, this lease structure will position CDLHT for capturing REVPAR upside.

Sweetener 1: fixed rent escalation every 10 years; downside protected. The fixed rent of S$5m for 10 years will be adjusted higher every 10 years to an equivalent to 50% of the average annual aggregate fixed rent and variable rent for the five fiscal years preceding the rent revision date. However, if this amount is lower than prevailing fixed rents, the fixed rent for the next 10 years will be unchanged.

Sweetener 2: safety net of guaranteed rent. For the first 12 months of the master lease, CDLHT will receive a minimum rent (net of property taxes and insurance premiums payable by the H-REIT trustee under the master lease agreement) of S$9.24m, which represents a net yield of 6%, based on the purchase consideration of S$154m. The minimum rent was derived out of the actual operational performance of the hotel in the last six months.

Sweetener 3: master lease could be extended up to 70 years. Studio M will be master-leased to the sponsor for 20 years, with a renewal option for two terms of 20 years each, and a third term of 10 years. The total lease thus could extend to 70 years, the longest for any SREIT lease. This represents considerable income stability for CDHLT.

Fully funded by debt; gearing to reach 26.5%. The manager intends to fund the acquisition by drawing down its S$1bn MTN programme. Cost of debt is expected to be about 2%. The manager expects asset leverage to rise to 26.5% from 20.4%. This leverage would still be low against the average SREIT average of 33%. Acquisition fees payable to the manager will be paid in units.

EGM required by end-April. As this is a related-party transaction, unitholders’ approval would be needed in an EGM by end-April. We anticipate deal completion by June.

Valuation and recommendation

Positive on the deal. We estimate FY11 DPU accretion of 4.2%. We believe that average room rates would trend up further over the next three years given that occupancy at 88.9% is already above technically full levels, and room revenue constitutes more than 90% of the hotel’s revenue. With this acquisition, CDLHT’s total fixed rent component will increase 8% to S$66.2m or about 47% of our FY11 revenue forecast. This represents considerable downside protection for a REIT positioned with the biggest upside in this hospitality upcycle. With this acquisition, CDLHT’s exposure to Singapore would increase, with a 15% addition to its Singapore hotel rooms to 2,711.

Maintain Neutral and target price of S$2.14. We earlier expected CDLHT to make an acquisition of S$150m at 6% net yields. We fine-tune our estimates, factoring in the lease structure. Changes to our DPU estimates are not material and our DDM target price remains S$2.14 (discount rate 8.6%). Although the manager has not disappointed us with this acquisition, given the keen competition for hotel assets in the past 12 months, expectations of Studio M have been priced in, we believe, and upside remains limited in the short term. Re-rating catalysts could include announcements of accretive acquisitions and stronger-than-anticipated REVPAR growth in 2011.

M-plifying growth

• Studio M hotel acquisition is attractive; initial yield of 6.1% has more upside

• Singapore exposure deepens; contributes 82% of forward earnings

• BUY, TP S$2.30 maintained

Buying Studio M Hotel for S$154m. CDL Hospitality Trust (“CDL HT”) is acquiring the 360-room Studio M hotel for S$154m or $428k/key. The hotel comes with a master 20 years lease, renewable for 70 years. The revenue sharing lease structure is pegged at 30% of hotel revenues + 20% of gross operating profit, with earnings downside protected through a fixed rent component amounting to S$5m. The vendor has guaranteed net rent of S$9.24m (c6.1% initial yield) for the first 12 months of operations under CDL HT.

Attractive deal to strengthen Singapore’s portfolio. This acquisition is considered attractive with an initial yield of 6.1%, above its implied yield of 5.85% and we believe there are avenues for further growth. Studio M’s average room rate of S$174/night is lower than industry average and we see more upside in 2011 backed by a sustained high occupancy of 88.9%. Its Singapore portfolio, which contributes a lion 82% share of topline, will continue to be the main driver of organic growth over the next 2 years.

Tweaked earnings, gearing is still low at 26%. Given the trust’s low gearing level of 20%, this acquisition will be debt-funded at an estimated cost of c3%. Gearing will head up to 26% post-acquisition, but still below management’s longer-term optimal level of 30-35%.

Maintain BUY and DDM-based TP of S$2.30. With Studio M hotel, CDL HT will further consolidate its pole position as Singapore’s largest hotel owner (c6% of Singapore room inventory) and continue to be the prime leverage on the robust tourism outlook in Singapore. CDL HT currently offers a yield of 6.1-6.8%.

CDLHT acquires Studio M Hotel for S$154m

No immediate need for equity fund raising, says trust manager’s CEO

AS expected by the market, CDL Hospitality Trusts has announced the purchase of Studio M Hotel, which soft opened in March last year, for $154 million or about $428,000 per room. The seller is a fully owned unit of CDLHT’s sponsor, London-listed Millennium & Copthorne Hotels.

The yield-accretive acquisition will initially be fully funded by debt, resulting in the trust’s debt-to-assets ratio rising to around 26.5 per cent post-acquisition, from 20.4 per cent at end-2010.

Asked if CDLHT had plans for equity fund raising, the trust manager’s CEO, Vincent Yeo, said: ‘There is currently no immediate need to raise funds due to our ample and diversified funding sources. At a post-acquisition gearing level of only 26.5 per cent and with the current favourable financing environment, we are likely to finance this acquisition with other debt facilities including the S$1 billion Multi-currency Medium Term Note Programme established last year.’

The $154 million price reflects a 6.1 per cent pro forma property yield for financial year ended Dec 31, 2010 – above the 5.3 per cent implied property yield for the trust’s existing portfolio over the same period. Assuming CDLHT had bought Studio M Hotel on Jan 1, 2010 and held and operated it through to end-2010, the trust’s proforma distribution per unit (before deducting income retained for working capital) for FY2010 would increase by 5 per cent or 0.56 cent to 11.74 cents.

On the stock market yesterday, CDLHT closed three cents lower at $1.94 amid a broad market fall.

CDLHT will issue a master lease for at least 20 years and up to 70 years on the hotel to M&C group. The 360-room hotel is in the Mohamed Sultan area. For the first 12 months, CDLHT will receive guaranteed net rent of $9.24 million from M&C group, which reflects about 6 per cent net yield on the $154 million purchase price.

The total acquisition cost will amount to $156.2 million, including the one per cent acquisition fee of $1.54 million to the trust’s manager (to be paid through the issue of new CDLHT units) and about $700,000 in other expenses relating to the deal.

Standard Chartered Bank said in a research note yesterday: ‘We expect (Studio M’s) net property income yield to rise to 7 per cent in 2011 and we estimate this acquisition to be 3 per cent accretive to 2011 estimated DPU (distribution per unit).’

The 26.5 per cent gearing level following the purchase of Studio M still leaves CDLHT with capacity for $350 million of new acquisitions, Stanchart added. The trust raised equity in 2007 and 2010 when gearing was 43 per cent and 31 per cent respectively.

The acquisition is subject to approval by CDLHT’s unit holders. The trust is a favourite among many analysts as it is a good proxy for Singapore’s booming hospitality business.

Studio M will be CDLHT’s sixth hotel in Singapore. Following the purchase, the trust’s hotel rooms inventory on the island will grow 15.3 per cent to 2,711 rooms, boosting the trust’s exposure to the buoyant Singapore hospitality market.

The nine-storey hotel was built on a 99-year leasehold plot that M&C group clinched for $45.8 million or $518 per square foot of potential gross floor area, at a state tender in November 2006.

In terms of future acquisitions for CDLHT, Mr Yeo said: ‘Singapore remains our favourite market in terms of prospects. By far, it is the most attractive market in the Asia-Pacific. We are also looking around South-east Asia and other growth markets like India and Vietnam, as well as Japan.’

He remained upbeat on prospects for Singapore’s tourism and hospitality sector, reiterating that there has been a ‘structural boost in accommodation’ since the opening of the integrated resorts last year. Hotel room demand will remain robust based on the official projection that visitor arrivals will increase from 11.6 million in 2010 to 17 million in 2015, he added. ‘The phased opening of new attractions at the IRs as well as other upcoming attractions in Singapore can be expected to sustain the growth momentum of the tourism and hospitality sector.’