Far East Hospitality Trust - OCBC Investment 2018-01-12: The Catalyst We Needed

Far East Hospitality Trust - OCBC Investment 2018-01-12: THE CATALYST WE NEEDED FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - THE CATALYST WE NEEDED

  • Only S$669k per key for prime asset.
  • 4.6% acquisition cap rate.
  • Upgrade to BUY.

4% DPU accretion on pro forma basis 

  • Far East Hospitality Trust (FEHT) has entered into a conditional agreement with its sponsor to acquire a 65-year leasehold estate in Oasia Hotel Downtown (OHD), a 314-room hotel in Tanjong Pagar, for S$210.0m which is equal to the lower of the independent valuations conducted by Knight Frank and Savills. 
  • Against an annual NPI of S$9.6m (the asset’s 9M17 NPI annualized), this represents an acquisition cap rate of 4.6%. 
  • The acquisition will be largely funded by debt, and upon completion, FEHT’s gearing will increase to 37.5%. On a pro forma basis, 9M17 DPU would be 4% higher at 3.09 S cents (pro forma) instead of 2.97 S cents. 
  • The acquisition is subject to the approval of stapled security-holders at an extraordinary general meeting to be convened.

Master lease provides downside support 

  • The asset will be master leased to Far East SOHO Pte. Ltd. for 20 years with an option to renew for another 20 years. The terms include fixed rent of S$6.5m per year and a variable rent comprising of 33% of the property’s gross operating revenue and 25% of gross operating profit minus fixed rent. 
  • If included in the 9M17 gross revenue for Far East Hospitality Trust (FEHT), Oasia Hotel Downtown (OHD)’s gross revenue would make up 8.9% of the group’s total revenue.

Clear potential for RevPAR improvement 

  • A quick check online reveals good reviews for Oasia Hotel Downtown on TripAdvisor (4.5/5, 1,346 reviews) and Booking.com (9/10, 2,280 reviews). 
  • Oasia Hotel Downtown’s RevPAR in 9M17 was S$170.0, which is below the hotel industry average of S$201.2 across hotel tiers. Considering that the asset is positioned as an “Upscale” tier hotel, we believe there remains sufficient ground for Oasia Hotel Downtown to gain to reach the RevPAR average of S$224.2 for upscale hotels in 10M17. 
  • We note the upside potential for the asset’s operational performance, given
    1. its strategic location within the CBD
    2. solid reputation with a flurry of awards and positive reviews online
    3. room for further growth with occupancy levels still in the low-80s. 
  • After updating our terminal growth rate from 1.5% to 2% and other adjustments, our fair value increases from S$0.65 to S$0.77. 
  • We upgrade FEHT from a Hold to a BUY.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2018-01-12
OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 0.77 Up 0.650