CDL Hospitality Trust - CIMB maintains Outperform

CIMB maintains its outperform call on CDL Hospitality Trust. This is based on its distributions per unit meeting the forecasts.  It is also expected that tourist numbers will continue to grow and this will in turn keep occupancy rates high.  In Singapore, the only other REIT that is perhaps similar in nature will be Ascott Residence Trust  which operates serviced apartments in Asia and beyond.  So both CDL Hospitality Trust and Ascott Residence Trust are deemed to be in the hospitality sector.

While industrial, retail or office REITs are fairly common, hospitality REITs seem slightly different.  Both Ascott Residence Trust and CDL Hospitality Trust are also perhaps unique in a certain sense.

Let's look at CDL Hospitality Trust and its acquisition of Studio M Hotel in Singapore.  Some of the unique components in the transaction are as follows:

• The Master Lessee is Republic Iconic Hotel Pte Ltd ( an indirect wholly owned subsidiary of Millennium  & Copthorne Hotel plc.
• The lease term is up to 20 years (with up to 70 years at the option of the Master Lessee)
• Rent payment is perhaps the most interesting compared to other REITs
• 30% of Studio M Hotel's revenue + 20% of Studio M Hotel's gross operating profit.  This is subjected to a minimum fixed rent of S$5.0million for initial 10 years of lease
• The first 12 months has a guarantee net rent of S$9.24 million (or a net yield of approximately 6% per annum of purchase consideration of S$154.0million.

The rent payment terms are perhaps more complicated compared to other REITs.  For e.g., the first 12 months is based on S$9.24 million.  To a certain extent, this probably helps ensure that the acquisition will be yield accretive (at least for the first twelve months).

The minimum rental for the first 10 years of S$5million will help to protect unitholders especially if the revenue and gross operating profit for Studio M is affected.  However, S$5million minimum fixed rent gives a much lower yield of only around 3.2% . Of course, the trust manager probably does not expect the rent payment to drop so low.