CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have increased their target price on CapitaLand Ascott Trust (CLAS) HMN after the REIT’s managers announced a proposed acquisition of three lodging assets and equity fundraising (EFR) of $300 million earlier this week.
Ong and Lock call the proposed acquisition “likely DPU-neutral” in FY2023 owing to a time lag between the EFR and completion of the acquisition in 4QFY2023.
In an Aug 3 note, Ong and Lock maintain “add” on CLAS with a higher target price of $1.32 from $1.27 previously.
This comes even as stapled securities in CLAS closed 9 cents lower, or 8% down, at $1.03 on Aug 3, after CLAS lifted a trading halt before the market opened. CLAS’s stapled securities touched a low of $1.02 during trading hours, compared to a previous close of $1.12.
CLAS’s managers estimate the proposed acquisition is 1.8% DPU-accretive on a FY2022 pro forma basis before considering the income uplift post AEIs at The Cavendish London and Temple Bar Hotel.
The long-stop date for the acquisition is Nov 30. The total purchase consideration of $373.3 million is based on the net asset value of the assets, which takes into account the aggregate property valuation of $530.8 million, note Ong and Lock.
Ebitda yield of the proposed acquisition is 5.1% and 6.5% pre- and post-AEI of The Cavendish London on a FY2022 pro forma basis, according to the managers.
The acquisition price represents a 1.8% discount to the latest valuation of $530.8 million, as valued by independent valuers HVS and Cushman & Wakefield, on June 30.
“We expect the acquisition to be DPU neutral at +0.2% in FY2023 given the time lag between the EFR and the completion of acquisitions, and +1.1% accretive in FY2024,” write Ong and Lock.
See also: CapitaLand Ascott Trust to raise $300 mil, proposes to acquire three lodging assets for $530.8 mil
According to an Aug 2 bourse filing, the private placement was issued at $1.043 and was approximately 2.7 times covered, while the issue price per preferential offering was fixed at $1.025.
At $1.043, the private placement issue price represents a 6.8% discount to the volume weighted average price (VWAP) of $1.1195 on Aug 1.
At $1.025, the preferential offering issue price represents an 8.4% discount to the VWAP.
The total gross proceeds of the EFR is approximately $303.1 million, comprising $200.0 million from the private placement and approximately $103.1 million from the preferential offering.
Asset enhancement initiatives
In addition to the acquisition, the managers have announced asset enhancement initiatives (AEI) at two existing properties: Novotel Sydney Central and Citadines Holborn-Covent Garden London.
Real estate investment management firm Colliers and HVS estimate that AEIs will deliver yields on AEI cost of approximately 11%.
The AEI at Novotel Sydney Central will take place during 4Q2024-1Q2026, costing $82.8 million, and increase room inventory by 72 rooms, or 28%.
According to Colliers, the AEI is expected to increase ebitda by $9.3 million and provide a $159.5 million valuation uplift, translating to a yield on AEI cost of 11.3%.
AEI works at Citadines Holborn-Covent Garden London will run during 3Q2023-1Q2024 and cost $19.9 million.
According to HSV, the AEI is expected to increase ebitda by $2.1 million and provide a $51.1 million valuation uplift, translating to a yield on AEI cost of 10.6%.
Ong and Lock tweak their FY2023-FY2025 DPU by -2.8% to +1.1% to reflect the proposed acquisitions and AEIs, forecasting DPU of 6.1 cents, 6.9 cents and 7.2 cents for FY2023, FY2024 and FY2025 respectively.
CLAS is CGS-CIMB’s top sector pick as its diversified and balanced portfolio provides stability and upside exposure to the hospitality sector, and portfolio reconstitution opportunities. “Catalysts include accretive M&As/divestments and strong revenue per available room. Downside risks include weak leisure/corporate travel demand, which could impact CLAS’s occupancy and room rates.”
As at 3.48pm, stapled securities in CLAS are trading flat at $1.03.
