Analysts have had mixed reactions to CDL Hospitality Trusts’ (CDLHT) announcement on August 31 that it had entered into a land purchase agreement and a development funding agreement to invest in a residential build-to-rent (BTR) forward funding scheme in Manchester, UK, for GBP73.3 million ($136 million).
See: CDLHT pivots to BTR, acquires property in Manchester
Following the announcement, CGS-CIMB Research has reiterated its “add” rating for CDLHT with an unchanged target price of $1.32. DBS Group Research and OCBC Investment Research have both kept their “buy” calls with DBS maintaining its target price at $1.35, while OCBC increased its target price marginally to $1.36, from $1.34 previously.
Meanwhile, Maybank Kim Eng kept its “hold” rating and target price of $1.20, while RHB Group Research maintained its “neutral” rating and target price of $1.25.
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee view the distribution per unit (DPU)-accretive deal as a new venture that will enhance income stability for the trust, given the average length of stay for residents will be between one to three years.
“There are minimal concerns on leasing out the property, given the potential strong demand due to limited BTR supply in the market and the strategic location of the property,” they point out. The property is in proximity to the Manchester CBD and within walking distance to Manchester Piccadilly Station.
There is also an upcoming High Speed 2 Railway, which will be integrated with Manchester Piccadilly Station and completed in 2035-2040, which will halve travel time to London from around two hours to an hour.
DBS analysts Geraldine Wong and Derek Tan are similarly upbeat on the deal, which they view as the "long-waited acquisition" following the divestment of Novotel Clark Quay last year. “While we acknowledge that the income gap post Novotel Clarke Quay will likely stay with investors for a few more years, the asset offers exciting and promising opportunities for CDLHT with complementary qualities against the current portfolio offerings that primarily consist of hotels which have been significantly impacted by the pandemic as travel borders were shut last year,” they say.
Wong and Tan see BTR as a superior product to typical buy-to-lease developments given its more curated offerings and amenities and given its stability and wider demand drivers. “This complements CDLHT’s predominantly hotel portfolio, where demand is more cyclical,” they add.
They also highlight that the development project offers a stabilised yield of around.5.1% which is higher than current trading yields for income-producing assets within the residential lodging segment within the UK. “Post completion, we see the potential for yield compression nearer to trading environment in the range of c.4.0–4.5%, which translates into upside in the range of c.10-25% on valuation,” they explain.
Meanwhile, other analysts have a more cautious take on the deal.
OCBC analyst Chu Peng points out that the deal will result in a negative impact on DPU over the next three years by 2.5%-5% due to interest expenses as as debt is drawn down progressively. However, Peng believes CDLHT could offset the impact on DPU with its undistributed capital of $90 million.
“We view this transaction as largely a positive but a project with shorter development period to provide near-term income support could be a better option, in our option. After adjustments, our fair value estimate increases from $1.34 to $1.36,” Peng says.
For Maybank’s Chua Su Tye, despite viewing that the deal, CDL’s first into an adjacent accommodation segment, is supported by “favourable growth fundamentals”, he believes that revenue per available room (RevPAR) visibility remains low against an uneven reopening recovery.
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To that end, he has maintained his forecasts and rating. “We prefer Ascott Residence Trust for its long-stay assets, and upside from capital distributions amid slower DPU growth,” he says.
The team at RHB has a “neutral to slightly negative” stance on the deal, mainly due to the DPU drag from interest payments. “The limited DPU accretion of 2.2% (pro-forma FY2020) and 1.5% (pro-forma FY2019), based on stabilised assumptions, is not attractive enough to compensate the risks of adding this new asset class, in our view,” the team says.
The RHB team also points out that the transaction, when completed, is expected to bring pro-forma gearing levels to 42.3%, based on a 100% debt assumption, which they view is on the high side. To this end, they anticipate management will do an equity placement to partially fund the deal, closer to the completion date.
As at 4.49pm, units in CDLHT are trading up 2 cents or 1.7% higher at $1.20.
Photo credit: CDL Hospitality Trusts