Barely a year after CapitaLand Ascott Trust (CLAS) HMN raised $170 million via a private placement, its managers announced an equity fund raising (EFR) to raise $300 million on August 2. Last year’s $170 million was priced at $1.12.
This year, the EFR comprises $200 million in a private placement and $100 million in a preferential EFR. The guide price for the private placement is $1.041 to $1.065 per new stapled security; the pricing for the preferential new stapled security is likely to be in the $1.025 to $1.044 range.
CLAS managed a slow recovery following the last plunge in its stapled security price following the August 2022 EFR. At the time, prices fell to a low of 88 cents post-placement, and as at Aug 1, prices managed to recover to $1.12, last year’s placement price.
Undoubtedly, market watchers expect and are prepared for CLAS’s stapled security prices to fall when trading resumes. Following the placement in August 2022, CLAS’s stapled security price fell from $1.17 to 88 cents, for a loss of more than 24% in the weeks following the announcement of the private placement and the subsequent issuance of 151.8 million new stapled securities. Investors may be wondering why they are invested in CLAS if there is constant pressure on stapled security prices via regular EFRs, market watchers say.
Moreover, in February this year, CapitaLand Investment (CLI) 9CI , CLAS’s sponsor, announced a distribution-in-specie (DIS) of 292 million of CLAS stapled securities representing 8.48% of CLAS stapled securities at the time. Following the DIS, CLI’s stake dropped to 29.05%.
Size is the reason
See also: CapitaLand Ascott Trust to raise $300 mil, proposes to acquire three lodging assets for $530.8 mil
Last year, most of the EFR proceeds were used to acquire nine serviced residences, rental housing and student accommodation properties across five countries from CLAS’s sponsor.
The “total capitalised cost” of the acquisition at $318.3 million would consolidate CLAS’s position as Asia-Pacific’s largest lodging trust, a press release dated Aug 15, 2022, stated. This year’s acquisition is larger, and will increase CLAS’s AUM by at least $530.8 million.
The acquisitions in 2022 were estimated to be 2.8% accretive to CLAS’s FY2021 distribution per stapled security (DPS).
See also: CapitaLand Ascott Trust 'top pick' of some analysts following 1HFY2023 results, DPS up 19% y-o-y
On Aug 2, CLAS’s managers announced the proposed acquisition of three lodging properties in UK, Ireland and Indonesia for an agreed property value of $530.8 million, subject to the approval of CLAS’s stapled security holders in an EGM. The acquisition is expected to add $13.5 million to CLAS’s pro forma 2022 total distribution, and to be 1.8% accretive to CLAS’s DPS, pro forma, based on the current EFR plan.
Gerry Chan, managing director, REIT investment at CLAS’s managers says that the blended ebitda yield of 6.5% on a stabilised basis is higher than the cost of debt of around 5%. Based on an assumed placement price of $1.04 or so, the historic DPS yield is likely to be around 5.45%.
Of the monies raised in the EFR, 56.7% will be used for the acquisition, 27.6% for an extensive asset enhancement initiative (AEI) for Novotel Sydney Central, 6.7% is for the AEI of Citadines Holborn-Covent Garden, 7.1% to be used for debt repayment and 1.9% for fees and expenses.
The acquisition properties comprise The Cavendish London, Temple Bar Hotel Dublin and Ascott Kuningan Jakarta.
Eight floors and 72 rooms will be added to the Novotel Sydney Central, with an estimated yield on AEI cost of 11.3%. The yield on AEI cost for Citadines Holborn-Covent Garden is estimated at 10.6%.
The Cavendish to shutter for several months
Both Novotel Sydney Central and Citadines Holborn-Covent Garden will remain open during the renovation period, says Serena Teo, CEO of CLAS’s managers.
See also: CLAS reports 1HFY2023 distribution of 2.78 cents, up 19% y-o-y
The main property in the $530.8 million acquisition is The Cavendish London, a 250-room hotel in Mayfair. The property’s “as-is” valuation as at June 30 is GBP215 million (the equivalent of $372.3 million).
Following a renovation and “stabilisation” of the property to be carried out in phases from 4Q2024 to 4Q2025, the valuation is likely to increase by GBP101 million from the June 30 valuation. The property is expected to achieve an ebitda yield on total capitalised cost of approximately 6.5% at stabilisation.
“For The Cavendish the renovation period is 15 months, takes place in phases and about half the time property may be temporarily closed to facilitate the renovation,” Teo reveals.
Analysts are wondering why The Cavendish is likely to shutter its doors for AEI just as London’s visitor arrivals are ramping up.
Chan says: “In terms of AEI it is intended to turn The Cavendish into a luxury product in the Mayfair market with GBP500 a night. The ADR (average day rate) is around GBP250. The Cavendish is a Triple-A location. Its ‘typical’ occupancy is around 80%.” Temple Bar Dublin will also undergo AEI but remain open.
One of the questions that popped up during the Q&A session on Aug 2 is whether the sponsor benefits from the AEI.
“There is an expected uplift in value post-AEI on top of the price of the agreed property value. Secondly, the AEI cost is co-shared with the sponsor. With this acquisition, 30% of consideration will be paid on completion of AEI. So alignment of interests is there between sponsor and CLAS,” Teo replies.
In addition, for the duration of the AEI, The Cavendish will be supported by the operator (who is also the sponsor) with a management contract with minimum guaranteed income. The minimum guaranteed income for The Cavendish will be GBP10.8 million or $18.7 million a year. Temple Bar’s contract is also a management contract with minimum guaranteed income of EUR4.2 million a year, and will be reduced depending on the downtime of the hotel.
Impact on DPS
Although the accretion of 1.8% appears modest, CLAS’s DPS is expected to rise a lot more in FY2023. In 1H2023, DPS rose 19% y-o-y to 2.87 cents. While this is lower than the 3.33 cents announced for 2H2022, the hospitality sector’s metrics continue to improve both in Singapore and CLAS main markets, which include “gateway” cities such as London, Paris, New York, Sydney and Tokyo.
“The London market has been performing very well since the Covid recovery and we believe that there are further legs to grow in the London market based on forward valuation by independent valuer HVS,” Teo says.
In 1H2023 though, CLAS’s DPS was below expectations. “While 1H2023 revenue of $346.9 million (+30% y-o-y) was in line, representing 49% of our FY2023 estimate, 1H2023 gross profit of $154.4 million (+31% y-o-y) disappointed, with 1H2023 gross margin stable at 44.5% (44.2% in 1H2022),” JP Morgan says.
The main cause was margins for management contracts, with minimum guaranteed income in 1H2023 “falling to 43.5% from 51.9% in 1H2022 owing to higher staff costs, property tax expense and maintenance expenses,” the bank added.
“While we expect a seasonally stronger 2H2023, results were below our/Street expectations, representing 43%/46% of our estimate/consensus. Underperformance was due to a lack of fixed cost leverage, with gross margins flat y-o-y owing to increases in operating expenses; and higher borrowing costs,” JP Morgan continues.
Following the EFR, JP Morgan may need more convincing of DPS accretion for the $530.8 million of acquisitions.
JP Morgan says: "After accounting for the equity raising to fund Novotel Sydney and Citadines Holborn-Covent Garden AEIs and interest savings post initial repayment of loans, CLAS estimates flattish accretion to proforma FY2022 DPS. However, there is risk of DPS dilution to FY2023/2024 DPS subject to quantum of prior divestment gains to be distributed and deployment of equity raising proceeds for other acquisitions to offset loss of income during the AEIs/renovations."
As a guide, CLAS’s pre-Covid DPS in 2019 was 6.4 cents; 6.41 cents in 2018 and 7.99 cents back in 2017, compared with 5.67 cents in FY2022.
