Hock Lock Siew
Published July 18, 2006

CDL Trusts needs clear plan for acquisitions


SINGAPORE'S first-ever hotel real estate investment trust (Reit) has finally been launched, and will no doubt add variety to Singapore's Reit market, which is expected to keep growing.

But while celebrating the arrival of yet another Reit on the market - all the better to make Singapore Asia's 'Reits hub' after Japan - investors should be concerned that CDL Hospitality Trusts does not seem to have a firm acquisition strategy.

The Reit is a stapled trust based on a hospitality Reit (CDL Hospitality Reit, or H-Reit) and a business trust (CDL Hospitality Business Trust, or HBT). HBT will be dormant at the time of listing.

H-Reit's assets now comprise four hotels in Singapore and a shopping arcade in one of the hotels - worth $846.3 million in all. But while the asset size and spread is respectable for a Reit dealing with a less volatile industry, market watchers think that for a Reit dependent on the hospitality business, assets with a greater geographical spread might prove more tempting to investors.

On paper, there is no reason why the Reit cannot acquire properties outside Singapore. H-Reit is after all sponsored by City Developments' London-listed subsidiary Millennium & Copthorne Hotels (M&C), which has 105 hotels in 18 countries around the world.

However, the hotels group has only granted the right of first refusal to H-Reit over future sales by, and offers to, M&C for hospitality assets in Singapore for a period of five years from the listing date.

The Reit's prospectus adds that M&C's remaining 101 hotels may form potential acquisition targets for H-Reit. However, during the Reit's launch last Monday, CityDev executive chairman Kwek Leng Beng said that M&C's hotels outside Singapore were not included in the Reit at the moment for a variety of reasons, including tax. The very same reasons might make these overseas assets difficult for H-Reit to acquire in the future.

The Singapore hotels sector is looking forward to boom times. Investment bank UBS, for example, believes that hotel room rates will increase steadily over the next three years. H-Reit's four hotels will certainly benefit from this.

The yields H-Reit is offering to investors seem reasonable. Based on the offer price of 83 cents a share, H-Reit has a projected distribution yield of 6.37 per cent for the annualised six months ending Dec 31 and 6.69 per cent for 2007 - lower than the recently launched Cambridge Industrial Trust, but higher than the last Reit to be listed on the Singapore Exchange, Frasers Centrepoint Trust.

Future returns

But while the yields seem fine for the first two years, investors need to know where future returns are coming from. H-Reit needs a clear plan for future acquisitions to continue delivering returns to shareholders.

In addition, little is known about the dormant HBT. Investors should not forget that they are purchasing two separate trusts.

According to the prospectus, HBT might become active if it 'undertakes certain hospitality and hospitality-related development projects, acquisitions and investments which may not be suitable for H-Reit'. More details are needed on the plans for HBT.

Vincent Yeo, chief executive of M&C Reit Management Ltd (H-Reit's manager), said during the Reit's launch that the Reit's aspirations are definitely cross-border.

Potential acquisitions could come from the rest of Asia and the Middle East, and Mr Yeo sees great potential in the Middle East. A lot depends on how H-Reit charts its expansion course after listing.