FE-HTrust – CIMB

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