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Brokers' take: CDLHT property deals seen as positive with 'buy' and 'hold'

BROKERAGES are positive on two recently proposed deals by CDL Hospitality Trusts (CDLHT), which will see the sale of Novotel Singapore Clarke Quay for S$375.9 million, and the buying of W Singapore hotel for S$324m.

CDLHT said on Thursday that it is also planning to make an up-to-S$475 million forward purchase of a new hotel that will be part of the new integrated development.

The move comes as real estate developers CapitaLand, City Developments Limited (CDL) and Ascott Residence Trust (Ascott Reit) on Thursday said they will together redevelop the Liang Court site. 

The site comprises Liang Court mall, midscale hotel Novotel Singapore Clarke Quay and serviced residence Somerset Liang Court Singapore.

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At the same time, Ascott Reit will sell part of its interest in Somerset Liang Court to CDL.

CDLHT will hold extraordinary general meetings in January 2020 to seek approval from its stapled securityholders for the Novotel sale and W Singapore purchase.

On the two CDLHT deals, Maybank Kim Eng maintained its "buy" call and target price of S$1.80. Analyst Chua Su Tye said the brokerage would adjust estimates after January’s extraordinary meeting, but expects capital distributions to rise in the near term with potentially lower operational distributions.

CDLHT’s Singapore RevPAR recovery should also gain traction into 2020 on stronger corporate demand, backed by a constructive supply outlook, Mr Chua added.

OCBC Investment maintained its "hold" call with an unchanged fair value estimate of S$1.69. Analyst Chu Peng said the transactions are "largely positive" for CDLHT’s long-term growth to further penetrate Singapore’s lifestyle hotel market.

"However, we are likely to see lower distributions and a slight drop in DPU in the short term due to the divestment of NCQ (Novotel Singapore Clarke Quay) and the acquisition of W Hotel is not able to fully mitigate the divestment impact," he added.

That being said, net sale proceeds from Novotel Singapore Clarke Quay could be used to smoothen out DPU (distribution per unit). CDLHT is also estimated to have a pro forma gearing of 35.3 per cent and debt headroom of S$512.7 million after the divestment of Novotel Singapore Clarke Quay and the acquisition of W Hotel.

Meanwhile, RHB maintained its "buy" call with a target price of S$1.78. Analyst Vijay Natarajan said the proposed transaction is positive as it would help rejuvenate an old asset into a higher-end hotel with a fresh 99-year lease term, with the current lease being 57 years.

This will eliminate higher capital expenditure needed to maintain the ageing asset, and benefit from the increased vibrancy in the Liang Court area with the acquisition price to be paid only upon completion, he added.

DBS Group Research analysts Derek Tan and Rachel Tan said the acquisition of luxury lifestyle hotel W would enhance the CDLHT’s growth runway. With a RevPAR of S$318 per night, there is potential to raise occupancy and rates – hence offering upside to the initial yield of 3.1 per cent.

On Ascott Reit’s sale of part of its interest in Somerset Liang Court to CDL, the analysts said using proceeds towards the redevelopment of a refreshed serviced residence product with a hotel licence would also allow for more operational flexibility to garner a broader clientele.