DBS: CDL Hospitality Trusts – BUY TP $1.40

<News Analysis> CDL Hospitality Trust: Doubling down in Manchester City

• CDLHT to acquire Hotel Brooklyn, a 4-star upscale lifestyle hotel and it’s second consecutive acquisition in Manchester; likely DPU accretion of 1.1% on fully debt-funded basis
• Master lease is on triple net lease terms of 59 years and on a starting yield of 7.4%; valuation upside potential exists as assets stabilise past the pandemic recovery
• Gearing will need to be watched closely as staggered development outlay needed for ‘The Casting’ asset; but potential revaluation of portfolio this year after the c.7% write down since pre-pandemic levels should help ease matters to an extent
• We currently have a BUY recommendation TP of S$1.40 and may look to review estimates

 Acquisition of 4-star upscale lifestyle hotel in Manchester UK

• CDLHT acquired Hotel Brooklyn, a 4-star upscale lifestyle hotel in Manchester UK. 
• The property is under a long leasehold term expiring 26 June 2218 or 196-year remaining lease term, carved out of a freehold lease.
• Acquisition price at £22.8m (c.S$41.5m) and below valuation at £25.3m (c.S$46.1m). 
• Asset sits at 57 and 59 Portland Street, and within 0.6km to Manchester Piccadilly Station and 1km to Manchester CBD, within walking proximity to key amenities and tourist attractions.
• The hotel offers a total of 189 rooms (c.26 sqm in average room size), over 220 sqm of meeting space, a casino and a restaurant and bar.

 Triple-net lease term of 59 years on a starting yield of 7.4%

• Hotel Brooklyn is leased out to HLD (Manchester) Limited on a triple net lease.
• Base annual rents is fixed at £2.3m and an NPI yield of c.£1.7m, subject to up-ward only adjustments pegged to inflation.
• All hotel sub-tenants will be under the care of the master lessees, which includes a casino and restaurant operator. 
• Rental obligations of HLD Limited is backed by a bank guarantee until May 2024, followed by a cash deposit of £1.5 million until May 2026.

 Doubling down on Manchester exposure

• The acquisition of Brooklyn Hotel comes shortly after CDLHT’s maiden residential built-to-suit acquisition in the same submarket. 
• Manchester is the second largest economic region in the UK after London, and one of the fastest growing cities within Europe. 
• Manchester’s economy grew by 8% in 2021 with predicted growth at 6.5% this year.
• Brooklyn Hotel’s close proximity to the CBD precinct, retail streets and entertainment hubs will bode well as a competitive advantage for both leisure and corporate travellers. 

 Small scale acquisition that moves a mark with accretion

• The acquisition is intended to be fully funded by debt, and to yield DPU accretion of 1.1% on pro forma FY21 basis. 
• Post-acquisition, exposure to UK will increase from 8.4% to c.10.0% and stand as CDLHT’s third largest market, behind Singapore (c.64%) and Oceania (c.11%).
• The asset is operationally new with a launch in Feb’20 slightly ahead of COVID. We note that rental income is not tied to underlying GOP and instead to inflation, which potentially limits additional upward rent in our view. 
• Nonetheless, starting yields of 7.4% stands attractive and sheltered under a fully fixed structure. 
• The biggest risk in our view would be counterparty risk associated with the master lessees. The pandemic was a test on the strength of master lessees, a risk we think is partially mitigated by in place rental guarantees up to mid-26, which should see hoteliers crossing the pre-pandemic mark in terms of recovery. 
• Moreover, cap rate compression will serve as valuation upside that should come alongside asset stabilisation in the coming years. 

 Keeping a close watch on gearing

• We recap that CDLHT will be expecting the launch of it’s Manchester Buit-To-Suit apartment (The Casting) in mid-24, a deal that will bring gearing towards 42.3% assuming debt-funding. 
• Payment for ‘The Casting’ is staggered between now to 2024 above funding needs for this acquisition. While initial outlay for this deal will be small given the asset size (c.1.5% of portfolio valuation), the write up of valuations should help to toggle gearing within the low c.40% range. 
• Portfolio valuation as at 31^st December 2021 is approximately c.93% of valuation before the pandemic as at end-2019, and should see a write up this year as global travel prospects brighten.  

 We currently have a BUY recommendation with a TP of S$1.40. Review of estimates underway.