Analysts from Citi Research and OCBC Investment Research (OIR) have maintained their “buy” call on CapitaLand Ascott Trust HMN (CLAS) after the REIT announced the proposed acquisition of the 329-room lyf Funan on Oct 1. CLAS will acquire the hotel from Ascott Serviced Residence Global Fund (ASRGF) at an agreed property value of $263 million.
OIR’s Ada Lim notes that SG&R Singapore (HVS) and Colliers have separately valued the property at $265 million and $271 million, respectively, and although the agreed property value of $263 million appears favourable compared to other deals in the market, the price accounts for the property’s leasehold tenure which ends on Dec 11, 2078.
In its statement, CLAS also announced that it will enter into a 20-year master lease agreement with a wholly-owned subsidiary of The Ascott Limited for lyf Funan. Ascott is the hospitality arm of CLAS’s sponsor, CapitaLand Investment (CLI).
The total acquisition will cost the REIT $265.1 million, which comprises a purchase consideration of $146.4 million, $113 million in loan repayments, as well as fees. The acquisition outlay will be largely funded by the divestment proceeds from Citadines Mount Sophia Singapore (CMSS) amounting to $142.8 million. CLAS will draw down $119.7 million of debt to repay the existing loan facility, while it will pay the acquisition fees with its stapled securities.
The acquisition is expected to raise its aggregate leverage to 39.1% from 37.2%, as of June 30, on a pro forma basis.
To Lim, the acquisition “makes sense” as CLAS will receive rent at 93.5% of the property’s gross operating profit (GOP). CLAS will receive no rent should the property’s GOP be zero. Through its master lease, which has an initial term of 20 years, CLAS - through the master lessor, Victory SR Trust - will be responsible for any related capital expenditure (capex) for the property. lyf Funan’s master lessee, Ascott, will be responsible for any property operating expenses.
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Furthermore, the acquisition is expected to be accretive to CLAS’s distribution per stapled security (DPS) as the earnings before taxes, interests, depreciation and amortisation (ebitda) yield of the acquisition is 4.7% on a pro forma basis and 1.5 percentage points higher than the exit ebitda yield of CMSS at 3.2%. The calculations also include a 3.5% interest rate on the loan, Lim notes in her Oct 1 report. The accretion translates to an FY2023 DPS of 6.67 cents from 6.57 cents, which represents a yield of 6.7% and 6.6% based on CLAS’s last-closed price of 99 cents as at Dec 31, 2023. CLAS’s net asset value (NAV) per stapled security remains unchanged at $1.16.
Citi analyst Brandon Lee notes that while the master lease provides some stability, rent payable at 93.5% GOP with no fixed component implies that income may be volatile in the cyclical hospitality sector.
Based on his estimates, CLAS’s DPS accretion would be smaller at 1% or 1.2% if 0% or 50% of management fees were paid in units. Meanwhile, gearing should come in at 38.7% following the divestment of Novotel Sydney’s Paramatta.
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In Lim’s view, lyf Funan is a “strong property” thanks to its social living brand that caters to corporate and leisure travellers. According to CLAS, the property has an average occupancy rate of over 80% year-to-date (ytd), outperforming the submarket.
“CLAS views Singapore as a key gateway city with favourable supply-demand dynamics, and the proposed acquisition will increase its proportion of assets in Singapore from 16% to 19% as at June 30,” she notes.
Citi’s Lee is less upbeat on the transaction despite lyf Funan’s positive metrics including its “decent” average daily rate (ADR) of above $200. In his report dated Oct 1, Lee expresses his concern that Singapore’s hotel sector has “likely reached or nearing its peak”. This is seen in the country’s 8M2024 revenue per available room (RevPAR) already 22%, which is above pre-Covid levels, but mitigated by 8M2024 tourist arrivals that are still 12% below pre-Covid levels. Singapore is also expected to see a lower room supply of [around] 2% beyond the end of 2024.
However, he likes that lyf Funan’s hotel licence and varied room types allow it to target different guest profiles, with corporate and leisure travellers comprising 20% and 80% to its business, respectively, and 15% and 85% comprising long and short stay travellers, respectively. He also states that lyf Funan’s GOP of 60% to 65% is relatively high compared to the typical 30% to 50% GOP for hotels and serviced residences.
Furthermore, CLAS has identified opportunities for both divestments and acquisitions have improved, targeting acquisitions in developed markets with existing presence, Citi’s Lee adds. Besides third party assets, the analyst notes that CLAS should explore its sponsor’s property pipeline, including CapitaLand Investment Limited’s (CLI) assets and remaining unsold properties with ASRGF.
As this is a major transaction that involves CLI, as a controlling shareholder, it will require CLAS’s stapled securityholders’ approval at the extraordinary general meeting (EGM) in November 2024, OCBC’s Lim says.
OCBC’s Lim leaves the forecast intact ahead of the completion of this acquisition, which is expected to happen in 4Q2024. However, she lowers the risk-free assumption by 50 basis points (bps) to 2.5%, which more than offsets an increase in beta to 0.99, leading to an increase in target price - or fair value estimate - from $1.08 to $1.10.
Citi’s Lee states that his unchanged target price of $1.12 is based on an average dividend discount model (DDM) and revised net asset value (RNAV) valuations.
As at 3.24pm, units in CLAS are trading flat at 97.5 cents.
