FE-HTrust – CIMB

23 September 2014
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First development project

FEHT has announced its first JV with FEOC – development of an upscale/mid-tier hotel project in Sentosa. While viewed as a positive, the project’s end-FY18 slated completion is expected to have minimal impact to the

company’s DPU in the near term. As such, with the stock having corrected by c.6.0% recently, coupled with the long-term positive impact from this project, we upgrade FEHT to Hold from Reduce, with a slightly higher DDM-based (discount rate: 9.0%) TP of S$0.83.

What Happened

Far East Hospitality Trust (FEHT) announced that it has entered into a joint venture (JV) agreement with Far East Organisation Centre Pte Ltd (FEOC) to develop a new S$443.8m hotel in Sentosa, Singapore. FEHT will contribute c.S$133.1m and hold a 30% stake in the JV. This project, with a 60-year leasehold, is an integrated development comprising two hotels: 1) ‘Outpost’ – 230 rooms targeting the upscale market, and 2) ‘Village’ – 620 rooms targeting the mid-tier segment. The project is targeted to be completed by end-FY18.

What We Think

Given that FEHT’s contribution to the proposed JV will be fully funded via debt (leverage ratio expected to rise to 34.4% post completion of the project), we view it positively as no equity dilution is expected consequently. In addition, this project is uniquely positioned to fill the mid-tier accommodation gap in Sentosa. Mid-tier rooms currently account for 8.1% (245 rooms) of total available hotel rooms in the vicinity. With an estimated average occupancy of c.80%+ in Sentosa and an average rate of low to mid S$200 per room/night for the mid-tier hotel rooms, we believe this is an underserved segment that FEHT can tap via the JV. Furthermore, by entering into the JV at this stage, FEHT is able to lock in lower cost of investment as compared to acquiring the development post-completion (development cost is c.38% lower than the average transacted price of hotels across Singapore). FEHT holds the ROFR to acquire the balance 70% stake of the hotel once the hotel stabilised.

What You Should Do

Given that this asset will only be completed at end-FY18, while the higher incurred interest payment, as highlighted by management, will be treated as non-capex expenditure, we project DPU to be minimally affected in the near term. With the recent correction to share price by c.6.0% and in view of its long-term prospect tapping an underserved market, we upgrade FEHT to a Hold with a slightly higher target price of S$0.83

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KepREIT – DBSV

22 September 2014
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Acquiring MBFC Tower 3 finally

  • Acquires MBFC Tower 3 at c. 3.6% initial yield
  • Lower risk profile due to drop in average age of portfolio and better cashflow visibility
  • HOLD, TP maintained at S$1.29

Purchases MBFC Tower 3 for S$1,248m. K-REIT announced the acquisition of a one-third stake in MBFC Tower 3 from sponsor, Keppel Land, for S$1,248m or S$2,790 psf. This represents a 2-3% discount to independent market valuations and within the S$2,181-2,830psf range of recently transacted CBD properties which we think is fair considering MBFC Tower 3′s premium location. Including income support, the initial yield stands at c. 3.6%.

Strengthens exposure to tight Singapore office market. By recycling the proceeds from the sale of the older Prudential Tower, an equity fund raising of c.S$413m and additional debt raised, the purchase of MBFC Tower 3 further strengthens K-REIT’s exposure to the tight premium grade office market. In addition, KREIT’s risk profile has been reduced, as the average age of its portfolio has dropped from 6.2 years to 5.5 years, lowering the need for extensive AEI’s. Furthermore, cash flow visibility has improved with the WALE for its top 10 tenants (46% of NLA) lengthening to 9.2 years from 8.5 years. Post acquisition, our FY15/16F DPU is lifted by a marginal c.0.1% with FY15 gearing increasing to c. 42%. Our DCF-based TP is maintained at S$1.29.

Near term re-rating; medium term earnings risks in FY15/16F; maintain HOLD. With the purchase of MBFC Tower 3 and equity fund raising “overhang” removed, we expect a near term re-rating of the stock. However, we see medium term risks coming from the fall-off of rental support from Ocean Financial Center, which is fairly significant (FY15 to see a c.11% drop in DPU). As such, forward yields of c.5.6%-5.7% (ex –OFC income support) are fair in our view, and we maintain our HOLD call.

Starhill Global – DBSV

22 September 2014
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Further savings from MTN issue

  • Refinancing RM330m senior bonds results in interest savings of S$0.7m p.a.
  • Diversified income stream and large proportion of master leased income offers resilience amid uncertainty in Singapore’s retail outlook
  • Upgrade to BUY, TP raised to S$0.90

Prudent capital management amid interest rate uncertainty. SGREIT announced that it has refinanced its outstanding MYR debt that was previously used to fund the acquisitions of Lot 10 and Starhill Gallery. A five year senior MTN was issued at a lower effective interest rate of 4.75% p.a. (vs. 5.35% previously), thereby extending the REIT’s debt expiry profile to 3.8 years from 3.2 years. We estimate that this will generate interest savings of c.S$0.7m p.a., or 0.4Scts per unit. As it stands, 100% of SGREIT’s total borrowings have been hedged into fixed rate debt, thereby providing investors with visibility and certainty about interest expense during a period of interest rate uncertainty.

Income resilience despite headwinds in Singapore’s retail sector. In our earlier report titled “Diving deep into the nuances of the retail sector” (17 Sep 14), we highlighted SGREIT as having one of the most resilient income streams among the Singapore-based retail and commercial SREITs, due to its geographic and asset class diversification, as well as sizeable base of income derived from master leases. We estimate that only c.30% of the REIT’s total revenue is directly exposed to Singapore’s retail sector, through Wisma Atria and level 5 of Ngee Ann City. As both assets are located in the prime Orchard Road area, we believe that they will be beneficiaries of the improvement in visitor arrivals in 2H14 and hence remain resilient.

Upgrade to BUY, TP raised to S$0.90. We like SGREIT for its resilience amid concerns about interest rate volatility and retail sector headwinds. At current prices, the stock offers dividend yields of 6.3-6.5% for FY14/15F, which is attractive, in our view. We upgrade the stock to BUY, with a higher TP of S$0.90.

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