CDL Hospitality Trust (CDLHT) Rights Issuance

Transaction Overview

CDLHT recently acquired two properties, Pullman Hotel Munich and Lowry Hotel Manchester in Germany and UK respectively. Due to the acquisition, the gearing ratio of the trust increased to 42.6%. The gearing limits the ability for the trust to pursue other acquistion in the future, hence it needed to raise equity to reduce the gearing ratio. The rights will be issued at S$1.280 per rights stapled security.

The analysis is divided into two parts.

Firstly, are the acquisitions by CDLHT accretive to the overall property yield of the trust?
Second , should you subscribe to the rights issue?

1) Are the acquisitions by CDLHT accretive CDLHT Munich One Pte. Ltd. (the “Purchaser”), entered into a share purchase agreement (the “Share Purchase Agreement”) for the acquisition of an effective interest of 94.5% in Pullman Hotel Munich (the “Hotel”) and its office and retail components (the “Commercial Components”) and the fixture, furniture and equipment used by the Hotel (“FF&E”, and together with the Hotel and the Commercial Components, the “Property”).

Before Acquisition FY 2016, NPI = S$137.56M
Post Acquisition FY 2016, NPI = S$146.70M
Before Acquisition FY 2016, Total Valuation of Property = S$2,175M
Post Acquisition FY 2016, Total Valuation of Property = S$2,339M

NPI Yield before acquisition = 6.32%
NPI Yield after acquisition of Pullman Hotel = 6.27%

Clearly, this transaction is not accretive and marginal.

Acquisition The Lowry Hotel Manchester, United Kingdom,  an iconic, 5-star luxury hotel in Manchester with 165 keys
Long leasehold interest with ~130 years remaining
Property Price: £52.5M (~S$94.1M) 
Net Property Income of £3.78M or S$6.615M assuming £1=S$1.75

Before Acquisition FY 2016, NPI = S$137.56M
Post Acquisition FY 2016, NPI = S$144.175M
Before Acquisition FY 2016, Total Valuation of Property = S$2,175M
Post Acquisition FY 2016, Total Valuation of Property = S$2,267M

NPI Yield before acquisition = 6.32%
NPI Yield after acquisition Lowry Hotel = 6.36%

The acquisition is accretive for Lowry Hotel Manchester but not Pullman Hotel Munich.

2) The next point should you subscribe to the rights issue?
After the transaction, the projected yield has decreased to 5.85%. This means that the transaction has made the DPS yield decrease. The current market price has corrected very quickly and the yield has maintain at about 6%. But more work needs to be done to ascertain the amount available for distribution and how it is being derived to come to a more conclusive results. The actual DPS yield can be even much lower. But overall, the manager has not done anything detrimental to the trust and we have a high probablity that the yield will stabilise around 6%. Hence the rights issue is not particular attractive nor unattractive. Hence if you have spare cash in your portfolio, do consider subscribing to the rights issues and holding on to it for the medium and long term.