CDL Hospitality Trusts is currently my top position in the portfolio so I am inclined to write about the news they have announced today.
The Trust announces two big news – the first being the acquisition of the Pullman Hotel in Germany, which amounted to about S$160m and will be fully funded by debt facility. The second short after being the launch of the renouncable rights issue amounting to a gross proceeds of S$255m to lower their gearing and improve their balance sheet.
This is quite an interesting news because it’s the first time I’ve seen a Reit doing this 2 layer set up announced on the same day. Usually, the Reit will be inclined to announce the acquisition first, and then subsequently followed by the method of funding a few weeks/months later.
What essentially happens is that the Trust is raising more proceeds to cover the acquisitions, and there will be immediate dilution impact to existing shareholders.
The renouncable rights is for 20 for every 100 at a price of $1.28.
Theoretical price will be at around $1.61 after the inclusion of the larger shareholding base.
Pro-forma DPU will drop from 10 cents to 9.43 cents, and yield will drop from 5.95% to 5.85%. NAV will also subsequently drop due to the enlarged equity base.
On the good side, gearing will drop from the current 36.8% to 33.6% after the rights issue and balance sheet will strengthen for the longer term.
My Thoughts
This is a stellar move from the management.
I’ve previously discussed in my theory here that when a Reit is at its 52 weeks high and trading above its premium, it is a good chance for them to raise an equity because they could do so at their advantage.
With most Reits currently at 52 weeks high and a premium, and with interest costs rising, you can be sure there will be more Reits that will be issuing equity via placement or rights.
This is a bad move for me because my play tends to capture their cycle of pre-acquisitions and post-rights and it is unfortunate that the share price has stalled in recent days not meeting my selling price.
The acquisition and rights will be immediately dilutive in nature so we should see a drop in the share price closer to its TERP.
We have not really consider the long term nature of the acquisition which might be “accretive” in its own way. The Munich acquisitions is a 5.9% NPI yield and is projected to grow at a 1.5% rate from now until 2018. The hotel is also a freehold in an important piece of land in Germany, so this might work out in the long run for long term shareholders.
Hi B,
First rights/money out for me in 2017. Guess a few more Reits will follow…
Hi PIF
Haha yes it is first for me too this year.
Hi B, will u take up the rights ?
Hi Wilson
Yes I will and will be applying for excess too.
hi B
i would like to know whether you will take up the right or not?
Hi Yeh
Yes I will and will be applying for excess too.
I am a little skeptical on raising more money to also lower the gearing. If the asset is good and well managed, with expected better economy since they are buying, the gearing will comes down naturally in future to prove their acutement, and this will help for more future purchase. Another is I always have the impression, which could be totally wrong, that Germany is not an easy place to do profitable business due to their laws/regulations.
.
Hi Cory
My take is industry takes certain cycle and valuation of the assets depends on cashflow as well so therea no certainty gearing will be auto lowered in that trend for the long term.
I think they can raise funds to lower the gearing to be more prudent, and then gear up again when the opportunities are there for the taking. They could raise lesser funds have higher gearing and lesser to gear up for the future. Same thing to me.
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