Date of Report: October 2, 2024
Broker: CGS International Securities Pte. Ltd.
Acquisition of lyf Funan Singapore
CapitaLand Ascott Trust (CLAS) announced its proposed acquisition of lyf Funan Singapore from Ascott Serviced Residence Global Fund (ASRGF) at an agreed property value of S$263 million, representing a 1.9% discount from the June 2024 independent valuation of S$268 million. The acquisition is expected to generate an EBITDA yield of 4.7% on a FY23 pro forma basis. CLAS plans to finance 54% of the S$265.1 million total outlay with divestment proceeds from Citadines Mount Sophia Singapore, while the remaining 45% will be financed through debt and equity.
This acquisition will be accretive to CLAS’s FY23 pro forma DPS, with management estimating a 1.5% DPS accretion before the CMSS divestment and 3.6% after it. Post-acquisition, gearing is expected to rise from 37.7% in 2Q24 to approximately 39.1%. The acquisition and master lease arrangement will be subject to an extraordinary general meeting (EGM) scheduled for November 2024, and the transaction is expected to be completed in 4Q24.
Master Lease Structure
The acquisition includes a 20-year master lease (renewable for an additional five years upon mutual agreement), under which lyf Funan will be operated by its sponsor. The rent payable to CLAS is set at 93.5% of the property’s gross operating profit (GOP), with a rent floor of zero if the GOP is negative. Operating expenses will be borne by the lessee. This structure allows CLAS to benefit from the property’s performance during periods of high demand while mitigating downside risks during weaker periods.
Increasing Exposure to Singapore
The acquisition of lyf Funan will raise CLAS’s Singapore exposure from 16% as of 1H24 to 19%. The 329-unit property, located in Singapore’s Civic District, benefits from its strategic position along the Formula 1 track. CLAS management reported that the property achieved occupancy rates exceeding 80% in FY23, with an uptick in occupancy during 1H24 compared to 1H23.
Financial Impact and Target Price
Following the acquisition, CLAS’s distribution is expected to increase by S$3.5 million, enhancing total distribution and translating into DPS growth. As a result, CGS International has adjusted its target price for CLAS from S$1.17 to S$1.18. The firm remains a top pick within its subsector due to its diversified portfolio, which provides stability and upside potential within the global hospitality sector. Additionally, the portfolio offers opportunities for reconstitution through accretive acquisitions and divestments.
Key Financial Metrics
- Current Price: S$0.975
- Target Price: S$1.18
- Market Capitalization: US$2,868 million
- Dividend Yield (FY24F): 6.24%
- Gearing: Expected to increase to approximately 39.1% post-acquisition
ESG Commitment
CLAS is part of the CapitaLand Group and aligns with its 2030 Sustainability Master Plan. By 2030, CLAS aims to obtain green certification for all its properties, with 51% of its portfolio already green-certified as of May 2024. In the 2023 GRESB Real Estate Assessment, CLAS was recognized as a Global Sector Leader in the Listed Hotel category, maintaining this position for three consecutive years.
Risks and Catalysts
Potential catalysts for re-rating include further accretive acquisitions and stronger-than-expected revenue per available unit (RevPAU). However, downside risks include weaker-than-anticipated corporate and leisure travel demand, which could impact occupancy and room rates.
This comprehensive overview highlights the significant developments surrounding CapitaLand Ascott Trust, providing insight into its strategic growth and financial outlook as of October 2024.
