CLAS's move to acquire lyf Funan Singapore is part of its portfolio reconstitution strategy to lift yields

On Oct 1, CLAS’ manager announced the proposed acquisition of lyf Funan from Ascott Serviced Residence Global Fund (ASRGF) at an agreed property value of $263 million. CLAS’ sponsor, The Ascott Limited (Ascott), holds a 50% stake in ASRGF. Of the agreed value, $146.4 million will be funded by proceeds from the sale of Citadines Mount Sophia which was divested in March this year for $148 million, at an exit Ebitda yield of 3.2%. The remaining amount will be from debt priced at 3.5%.

lyf Funan’s Ebitda yield of 4.7% will be accretive to distributions per stapled security (DPS) on a pro forma basis and is expected to increase CLAS’ total distribution by $3.5 million, which translates to a DPS accretion of 1.5% for FY2023 on a pro forma basis.

“The proposed acquisition rebalances our proportion to Singapore. The proportion of assets that we have in Singapore will increase from about 16% to 19%. We will continue to increase our presence in Singapore. Among the pipeline of projects that we have, is Somerset Liang Court. It is being developed within the CLAS portfolio and planned to be completed by end-2026,” Teo says. 

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The occupancy of lyf Funan is around 80%, and its average room rate (ARR) is more than $200, with 15% of demand for its larger four and six-bedroom apartments are from corporate guests. The ARR is higher than lyf one-north, which is also part of CLAS’ portfolio. lyf Funan has a full hotel licence with a lower average length of stay, one of only two CLAS properties in Singapore with a full hotel licence, the other being The Robertson House by The Crest Collection.

At just five years old, major capital expenditure (capex) isn’t required in the short term. “The property is immediately income generating right from day one of the acquisition,” Teo adds. 

Upon completion of the proposed acquisition, CLAS will enter into a master lease with Ascott for lyf Funan..The proposed acquisition and entry into the master lease received strong approval from stapled securityholders at CLAS' Extraordinary General Meeting on Nov 18 with 99.67% of the votes supporting the resolution. The transaction is expected to be completed by 4Q2024. 

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After the completion, CLAS will have five properties in Singapore. The portfolio will remain geographically diversified, with each of its key markets comprising no more than 20% of its total assets.

Portfolio reconstitution lifts yields

“We've done a lot of portfolio reconstitution in the last few years. In terms of divestments, we tend to divest assets that have reached their optimal life cycle, and those that we think are in less prime locations. In France, we've divested assets in regional France and invested in Paris,” Teo says.

In 2023 CLAS divested two assets outside of Sydney’s central area for A$109 million and announced a A$90 million asset enhancement initiatives (AEI) for Sydney Central Hotel including the building of a new block which will add 28% to room inventory. The return on investment for the AEI is estimated at 11.3%.

Also in 2023, CLAS announced the acquisition of Dublin’s Temple Bar Hotel and The Cavendish London (The Cavendish), coupled with AEIs for both properties. The AEI for The Cavendish costs GBP60 million, half of which will be borne by the sponsor, Teo says. “We pay less than GPB30 million and the full uplift of GBP101 million to valuation belongs to CLAS. It’s very good value for stapled securityholders given its location in Mayfair, near Fortnum & Mason.”

CLAS announced eight AEIs for a cost of $250 million, partly funded by the sponsor in 2023-2024. As at 3Q 2024, CLAS has completed AEIs for five of its properties, namely The Robertson House by The Crest Collection, Citadines Les Halles Paris, Citadines Kurfürstendamm Berlin, La Clef Tour Eiffel Paris and Citadines Holborn-Covent Garden London. The Temple Bar Hotel’s AEI will complete in 4Q2024. Hence CLAS’ 2025 income will get a lift from six of the eight AEIs.

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“By the end of the year we will have completed six AEIs, which means the six projects will contribute fully to our 2025 income.  “The remaining two – The Cavendish and Sydney Central Hotel – are actually the larger projects. For example, The Cavendish will be closed for a short period of time,” Teo says.

Treasure trove of divestment gains

On Oct 22, CLAS announced the divestment of Somerset Olympic Tower Tianjin at a premium to book value, to be completed next year. In 1HFY2024, CLAS’ properties in China contributed 1.4% to the trust’s total gross profit. The divestment of Somerset Olympic Tower Tianjin will have minimal impact on gross profit. Post-divestment, CLAS will have four properties in China.

“The agreed divestment came after months of negotiations. In a similar way to all our divestments these two years, that particular asset is also ageing and has reached its optimal stage of the life cycle,” Teo says.

CLAS has divested a total of over $500 million in assets year-to-date. The properties were divested at a premium to book value, unlocking about $60 million in gains. These divestments bring CLAS’ gains from divestment to more than $300 million (after distributing $90 million during the two years of Covid) which can be used to top up DPS.

“During the period that The Cavendish is closed, we will use our undistributed divestment gains to top up the distributions to stapled securityholders as if it was not closed,” Teo says.

In 3QFY2024, CLAS’ gross profit rose by 8% y-o-y, with gross profit on a same-store basis rising by 2% y-o-y.  

“It is important for us to keep our eye on core DPS from operating income,” Teo says. Completed AEIs added to higher operating income, net of the effect of loss of income from properties divested by CLAS. “The net impact of the portfolio reconstitution yielded us a higher gross profit on a year-on-year basis,” Teo says. 

“When we repay our financial loans there is an opportunity for realised exchange gains,” Teo reveals. “It is non-recurring. I want everyone to focus on core DPS as that is the measure of portfolio performance to keep core DPS returns stable.”

Forex impact on gross profit within 3%

With such a diverse portfolio with 55% of assets in Asia-Pacific, 25% in Europe and 20% in the US, foreign exchange management is a key component for the trust as distributions are in SGD.

CLAS manages forex in two major ways. Balance sheet hedging is when CLAS uses debt to acquire a property outside of Singapore in the same underlying currency as the property. The other part is hedging income repatriated to Singapore.

“We will hedge the exchange rate of the distributable income that we expect to receive. We tend to hedge about 20% to 40% of our key currencies (USD, GBP and Euro),” Teo says.

CLAS doesn’t hedge everything all the way because of the expense, and its geographical diversification. “We receive income in 12 foreign currencies in addition to the Singapore dollar. Within the 12 foreign currencies, there will also be an offset,” Teo elaborates.

CLAS will hedge against the year-end rate. This means that in 2024, income will be hedged against closing rates of 2023, and in 2025, the forex hedging will hedged against rates achieved in 2024.

“In the last 18 years, we've kept the foreign currency impact on gross profit at a very tight band of between plus-minus 3%. For the first nine months of this year, the hedging impact for foreign currency comes in at minus 1.6%,” Teo says.

Plans to raise exposure to longer-stay accommodation

CLAS’ stated aim is to raise its exposure to longer-stay accommodation such as student housing and rental housing to 25% to 30% of portfolio value from the current 19%. In June this year, CLAS acquired the remaining 10% stake in Standard at Columbia, a student accommodation asset near the University of South Carolina, taking its stake in the property to 100%. It is fully leased for the current academic year, and is 70% pre-leased of the academic year 2025-2026. Its Ebitda yield on CLAS’ total investment cost in 100% of the property of US$103.6 million ($139.3 million) is expected to be about 7%. Altogether CLAS owns eight student accommodation assets.

“All our properties are very close to a university where enrolment trends are strong and occupancies are resilient,” Teo says. CLAS’ student accommodation assets cater mainly to domestic US students.

The average leased occupancy of the properties for the academic year 2024-2025 is 90% as of Sep 2024 with rent growth for the academic year at around 4.5% y-o-y. Excluding Wildwood Lubbock which has completed light AEI in Aug 2024, rent growth is 6% y-o-y.

“Key is our diversification across countries, asset types and the ability to cater to different lengths of stay. People couldn’t travel in or out, so we had long-stay guests who continued to stay in our properties. Some properties were also booked for government quarantine measures. Longer-stay properties like student housing and rental housing properties with lease terms of a year and up were also resilient,” Teo indicates.

When asked what it’s like to manage a vehicle like CLAS that is primed to provide staid and steady distributions, Teo replies, “exhilarating, never a dull moment.”