Serena Teo, CEO of the managers of CapitaLand Ascott Trust HMN (CLAS), says she is “confident” that the REIT’s latest acquisition of lyf Funan puts it in a good position for “sustained growth”. Teo was speaking at a briefing held for analysts and the media on Oct 1 after CLAS announced that it was acquiring the 329-room property at an agreed property value of $263 million. The hotel is independently valued at $265 million by SG&R Singapore and $271 million by Colliers Singapore.
The REIT will acquire lyf Funan from Ascott Serviced Residence Global Fund (ASRGF), which is 50%-owned by CLAS’s sponsor, The Ascott, and the Qatar Investment Authority.
The total acquisition outlay is $265.1 million, which comprises a purchase consideration of $146.4 million, $113 million in loan repayments and fees. The sum will be funded mostly from the proceeds of CLAS’s divestment of Citadines Mount Sophia Singapore, which amounts to $142.8 million. CLAS will also draw down $119.7 million of debt to repay the existing loan facility. Finally, it will pay the acquisition fees with its stapled securities.
The proposed acquisition is expected to increase CLAS’s total distribution by $3.5 million, translating to a distribution per stapled security (DPS) accretion of 1.5% on a pro forma basis in FY2023. The ebitda yield of the proposed acquisition is 4.7%, also on an FY2023 pro forma basis.
Throughout the briefing, Teo noted that the managers were “very happy” with the property so far and said it was “doing well”. She adds that the REIT did not just look at the pipeline offered by ASRGF, but the property’s risk-reward profile was something the REIT managers liked.
Lai Dongliang, head of investment and asset management at CLAS, adds that the property was the “best” in the entire pipeline after comparing the attributes of all the assets the REIT looked at, along with the available opportunities in the market.
See also: Analysts keep 'buy' call for CapitaLand Ascott Trust after lyf Funan acquisition
Ticked all the right boxes
Located in the Funan integrated development within Singapore’s Civic District, lyf Funan opened in 2019 and has a hotel licence. It offers a variety of room choices ranging from studios to six-bedroom units, which means it can cater to short stays and extended stays, Teo shares.
For the 8M2024, lyf Funan has an occupancy rate of over 80%, which is higher compared to properties in the sub-market. During the same period, the hotel’s average daily rate (ADR) also stood above $200, she adds.
See also: Elite UK REIT to divest Hilden House for GBP3.3 mil
When asked about the REIT managers’ plans on occupancy and room rates, Teo reveals that the REIT is looking to increase both, but acknowledged that there is “more room” to grow in terms of occupancy rates.
“I think it would be logical to assume that the property has been trending upwards, because the years prior to 2023 [were] actually Covid-19 years. So during [the] Covid-19 years, this property lent itself more to long stays, other than short stays,” she says. At present, the hotel caters to corporate and leisure bookings as well, with the former accounting for 20% of full demand. Short-stay guests make up some 85% in total, while longer-stay guests make up the remaining 15%.
“So now that we’ve recovered from Covid-19 and this property is able to build up in terms of short and long stay [and] whether it is from leisure or corporate, that gives it a nice profile right now,” Teo adds.
On whether the REIT was acquiring lyf Funan at the peak of Singapore’s revenue per available room (RevPAR) cycle, coming off several events including the F1 in September, Teo notes that the city-state will always have a “resilient demand” for hospitality.
“There could be some ups and downs across months, especially [if] you’re comparing events and non-events months. But we look at the travel stats, from [the Singapore Tourism Board or Smith Travel Research], the demand in Singapore remains healthy,” Teo shares.
She notes that supply will remain “quite restricted” moving forward. “When we look at the supply from 2024 onwards, that is estimated at about 1.8% so the supply-demand dynamics actually work in our favour.”
Moreover, the property was “right” for CLAS as it ticked all the right boxes including its location in a key gateway city, prime location and resilient demand in terms of lodging. Furthermore, the property was acquired at a “very attractive price” with its 4.7% entry yield compared to its exit yield of 3.2% for Citadines Mount Sophia Singapore.
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Upon the completion of the acquisition, CLAS will enter into a master lease with The Ascott for the hotel. The lease will have an initial term of 20 years and is renewable for a further five years should both parties agree. The rent payable by the master lessee will be at 93.5% of the property’s gross operating profit (GOP).
The lease was structured in a way that the lessee will bear operating expenses (opex), says Lai. Should the property’s GOP become negative, the lessee will bear the full cost of debt or opex, he adds.
“Between a management contract and master lease, the master lease, at the end of the day, is a rental to us,” explains Teo. “In the case of negative profit, the rent to us is zero, versus in a management control whereby it could go negative.”
The managers also considered the proportion of GOP when negotiating the lease, she adds. “You will see that the proportion of GOP is actually on a very high threshold, 93.5%. So it allows us the downside protection, as well as an upside capturing to get the full potential of this property.”
‘Very comfortable’ with gearing levels; EFR unlikely
Following the completion of the acquisition, CLAS’s aggregate leverage is expected to remain at 39.1%, which is “very comfortable” to the REIT managers. “We’re actually very comfortable operating at levels under 40%,” says Teo.
With part of its payment in debt, the REIT managers have assumed a pro forma cost of debt at a fixed rate of 3.5% over a five-year loan tenure, CFO Kang Siew Fong adds.
At the moment, a pre-emptive equity fund raising (EFR) exercise is also unlikely, as the REIT has “sufficient liquidity” to take on the activities it has announced, continues Teo.
‘Optimistic’ on demand for lodging
After the acquisition, about 19% of CLAS’s properties will be in Singapore, up from 16% previously. The REIT currently has a presence in 16 countries, with the Asia Pacific region remaining its “core”.
With activity and interest improving for divestments and acquisitions, Teo reveals that the REIT has “certain interests” in some of its properties that it will bring to market once the discussions meet the REIT managers’ pricing.
She adds: “There are several other developed countries that look interesting, including developed markets that we currently have a presence in...mainly in Japan, as well as some parts of Europe.”
