Category: FE-HTrust
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
Hotel REITs – CIMB
Quantity lower, quality higher
Visitor arrival to Singapore was flat yoy in 1Q14. This was largely due to lower Chinese visitor arrivals in Feb and Mar, which we attribute to: 1) a new tourism law in China, and 2) the MH370 incident. Although the number of visitors from China has dwindled, we believe the average Chinese spending in Singapore has strengthened, benefitting the luxury and upscale hotels. We maintain our Add rating on OUE-HT (TP: S$0.96) and CDL-HT (TP: S$1.97), and our Reduce rating on FEHT (TP: S$0.80).
What Happened
Recent data from the Singapore Tourism Board (STB) revealed that visitor arrivals to Singapore remained flat yoy in 1Q14. During this period, higher visitor arrival from South East Asia (+4.1% yoy), on the back of stronger arrivals from Indonesia (+5.5% yoy), was offset by weaker visitor arrivals from China (-14.0% yoy). On the other hand, it was noted that RevPAR for Singapore hotels during the first four months rose by 2.1% yoy, despite a 0.7% yoy drop in occupancy. The growth was attributed to the upscale and luxury hotel segments, where RevPAR expanded by 10.1% and 3.1% yoy, respectively, vs. -4.4% in the mid-tier and +0.2% in economy segments.
What We Think
The slowdown in visitor arrivals from China could mainly be attributed to 1) the new tourism law in China which took effect in Oct 2013, and to a lesser extent 2) the MH370 incident. During Feb 14 and Mar 14, Chinese visitor arrivals dropped by an average of 19.5% yoy. During this period, although fewer Chinese came on multi-country package tours, more are travelling here on their own – and this group of visitors tend to spend more. As highlighted by data released by STB earlier this year, total Chinese tourism receipt in 4Q13 grew by 1% despite visitor arrival from China dipping by 31% over the same period. During 2013, Chinese spending was also noted to reach c.S$3.0bn, exceeding the Indonesians (at S$2.3bn) for the first time since 2007. Furthermore, tourism shopping tax refund company Global Blue recently pointed out that Singapore remains the second most favoured shopping destination for the Chinese after Paris. This trend is expected to strengthen further as the government aims to position Singapore as a top luxury lifestyle destination through various partnerships with Chinese tourism providers. Besides the patronage from big Chinese spenders, the upscale and luxury hotel segments are expected to benefit from 1) stronger Indonesian visitor arrivals, 2) packed calendar of events in 2014, and 3) a potentially stronger corporate spending trend as the global economy continues to recover in 2014.
What You Should Do
With the luxury and upscale hotel segments’ RevPARs expected to be strong in 2H14, we maintain our Add rating on OUE-HT (TP: S$0.96) as the company has the ability to boost RevPAR through the sponsor-funded AEI of its Mandarin Orchard hotel. Similarly, we remain positive on CDL-HT (Add; TP: S$1.97) and expect continual good performance from its Singapore and Maldives portfolios. On the other hand, we are negative on FEHT (Reduce; TP: S$0.80) as we expect its portfolio of mid-tier hotels, particularly those located along Orchard Road, to come under pressure amid intensifying competition in the coming months.
FE-HTrust – CIMB
Pure Singapore hotel play
With a portfolio diversified across Singapore and about 25% of it (by asset value) made up of serviced residences, FEHT is well-positioned to tap the visitor market in Singapore, in our view. In addition, fixed and commercial rents offer an estimated 60% (based on FY13 earnings) of gross income protection, which makes FEHT one of the more defensive hospitality REITs in Singapore.
We initiate coverage with a Hold rating and DDM-based (discount rate 9.0%) target price of S$0.82. Although earnings are expected to be resilient, we believe FEHT is fairly valued given the lack of strong near-term drivers, a lower NPI yield than peers and a higher valuation for its portfolio. Re-rating, however, could come from any positive surprises in tourist arrivals or corporate spending.
Diversified hotel player
FEHT‟s investment mandate is to invest locally, where the hospitality outlook is stable. As such, risks from foreign exchange and tax leakage from overseas expansion are minimised. Although only five of its 12 assets are located in the prime districts of Singapore, others are located nearer tourist districts and hospitals, enabling FEHT to tap the various visitor market segments of Singapore. At end-Dec 13, hotels (including commercial space/rentals) in its portfolio made up 75.4% of its asset value and 85.2% of FY13 gross revenue, with the rest coming from serviced residences.
In line with peers
FEHT is trading at 7.4-7.5% FY14-15 dividend yields, in line with its peers. At 0.8x FY14 P/BV vs. 1.0x for its closest peer, CDLHT, we believe its current price captures the differential in their book valuations (estimated value per room key of S$854k for FEHT vs. S$586k for CDLHT‟s local assets). In addition, NPI yield (estimated at 5.5%) for its hotels is also slightly lower than the c.6% for the other hotel REITs.
Initiate with Hold
FY14 RevPAR is expected to be flat as potential upside from sturdier corporate spending is likely to be offset by strong competition, a result of high supply of hotel rooms. Our target price of S$0.82 implies a dividend yield of 7.0% and potential stock upside of 5.6%.
FE-HTrust – OCBC
3Q13 results in line
- 3Q13 DPU of 1.41 S cents
- Hotels outperform peers
- Maintain HOLD
3Q13 as expected
Far East Hospitality Trust (FEHT) announced 3Q13 results that were in line with ours and the street’s expectations. 9M13 distribution per stapled security of 4.22 S cents formed 74% of ours and 73% of the street’s prior FY13 forecasts. Gross revenue for was S$31.5m or 9.4% lower than management’s forecast (based on IPO prospectus and the circular for the acquisition of Rendezvous). Net property income was 9.4% below forecast at S$28.5m. Income available for distribution was S$24.2m or 7.4% below forecast. 3Q13 distribution per stapled security was 1.41 S cents or 7.8% lower than forecast. However, we emphasize that the results were within expectations for the market.
RevPAR down 2.7% YoY
RevPAR for the hotels, excluding the Rendezvous property (which was acquired on 1 Aug), was S$167.1, 10.2% below forecast and down 2.7% YoY mostly due to price competition in the sector. Average room rates were lower by 1.9% YoY, while occupancy was ~0.7 ppt softer YoY at 86.7%. FEHT’s mid-tier hotels saw RevPAR decline 0.4% YoY, while RevPAR for its upscale hotels fell 10.1%, affected by lower corporate spending. Management anticipates a subdued 4Q13, although RevPAR could show moderate growth in 2014. Rendezvous property is tracking in line with its expectations. FEHT’s hotels continued to perform relatively well compared to the industry. Mid-tier and upscale categories in industry-level data demonstrated declines of ~2% and ~12% respectively. The serviced residences registered RevPAU that was higher by 2.3% YoY at S$227.1, although this was 0.6% lower than forecast. Management is seeing increased competition for stays of 6-months or longer, and it warns that competition could increase further next year.
AEI plan
Management has plans for ~10% of their room inventory to undergo AEI starting from next year, and will spend ~S$10m in capital expenditure. This is also in line with our expectations.
Maintain HOLD
We maintain a FV of S$0.92 and HOLD rating on FEHT. We forecast a FY13 yield of 6.3%.
FE-HTrust – DBSV
Rendezvous in town
- Value accretive acquisition in Rendezvous Grand Hotel Singapore and Rendezvous Gallery
- Capital structure remains at sustainable level, FY13-14F DPU raised by 1-2%
- BUY, TP raised to S$1.21
Proposed acquisition of prime hotel in downtown Singapore. Far East Hospitality Trust (FEHT) announced the proposed acquisition of 298-room Hotel Rendezvous Grand Singapore Hotel and Rendezvous Gallery, its accompanying retail wing. The combined acquisition price is S$264.5m (all in cost of S$268m) for a 70-year leasehold interest in the property and represents a c.2-5% discount to the appraised valuation by independent valuers.
Value accretive deal for unitholders. Given the hotel’s prime location, we believe this is an attractive deal and will cement the trust’s position as one of Singapore’s largest hotel owners. Post acquisition, FEHT will sign a master lease arrangement with its sponsor Far East Organization (FEO), who will manage the hotel. FEHT will earn a return that is pegged to underlying hotel performance but with a fixed rent that offers earnings protection.
New equity issued to vendor; capital structure remains sustainable. FEHT will issue new equity (S$136m or 51% of total acquisition price) to the vendor, Straits Trading Company Limited (STC) and FEO to part fund the purchase, which will result in its gearing level remaining fairly stable at c.32%, which we believe to be a sustainable structure going forward. We view that the willingness of the vendor, STC, taking a stake in FEHT as part payment consideration as signal of the group’s positive stance in the sector going forward.
BUY, TP S$1.21 based on DCF. Our DPU estimates are raised by c.1-2% to account for this acquisition. TP is raised to S$1.21, offering a total return of 11%. Maintain BUY.