Category: FE-HTrust
Hospitality – DBSV
Pockets of opportunity
• Visitor arrivals in 2013 to continue rising
• Soft operating outlook with new completing supply to make hotel landscape more competitive
• Limited opportunities to raise ADRs, Industry RevPAR to grow by 3% (vs 5% previously)
• FEHT our pick given its superior earnings profile
Visitor arrivals in 2013 to continue growing. Notwithstanding a slow start, we believe Singapore’s tourism sector in 2013 continues to hold promise with the opening of new major attractions like the Marine Life Park, River Safari and the International Cruise Terminal anchoring Singapore as a regional holiday destination. Moreover, our top visitor markets like Indonesia and China (c30% of total visitors), continue to grow strongly. We expect visitor arrivals to grow 7.7% to15.3m in 2013 vs the expected 14.2m visitors in 2012.
New rooms added; industry occupancy levels to remain fairly stable. We expect the operating environment to remain competitive coming from 4,028 new rooms (1,572 rooms in 2012, remaining 2,456 rooms over 2013). Despite that, our base case scenario of 15.3m visitors should translate to record stable occupancies of c83%. Upside will hinge on the average length of stay (LOS) profile, which could increase if visitors extend their holidays to cover the full range of attractions available. We estimate that a 0.1 day extension in the LOS results in a 2 ppt increase in occupancy rates.
Moderating trends in recent months points to weaker visitor spending. After a strong start in 2012, we sense that travelers have turned more cautious in spending from the (i) weaker average spending per visitor in recent quarters and (ii) the relative weakness in the luxury and upscale hotel segments, implying that travelers, are trading down to cheaper accommodation. Thus, going forward, with competition from newly opened hotels, we expect hoteliers to focus on maintaining occupancies and see limited opportunities in raising average daily rates (ADRs). e expect the industry to record a 3% y-o-y growth in RevPAR (vs 5% before) in 2013.
Stock picks. Within the hospitality plays, FEHT offers the highest earnings growth given that 25% of its portfolio is currently undergoing refurbishment and will complete in the next 2 quarters. Further upside catalysts hinges on the proposed acquisition of Rendezvous Singapore Hotel.
FE-HTrust – OCBC
PROPOSED ACQUISITION OF RENDEZVOUS GRAND HOTEL SINGAPORE
- Pure Singapore hospitality play
- Rendezvous Grand Hotel Singapore
- Reduce FV to S$1.02
Largest diversified hospitality portfolio by asset value
The portfolio of Far East Hospitality Trust (FEHT) consists of 11 properties in Singapore, including seven hotels and four serviced residences, giving a total of 2,531 rooms/units. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b.
Proposed acquisition of Rendezvous Grand Hotel
In Nov, FEHT and Astor Properties Pte. Ltd., a member of the Far East Organization group (the sponsor) entered into a non-binding memorandum of understanding (MOU) with The Straits Trading Company Limited to acquire Rendezvous Grand Hotel Singapore and its retail component Rendezvous Gallery Singapore. FEHT is exploring the proposed acquisition of a leasehold interest in the property, while the sponsor is exploring the proposed acquisition of the reversionary interest for the remaining leasehold period in the property. FEHT also entered into a separate non-binding MOU with the sponsor to grant a master lease of the hotel component to the sponsor as master lessee under a master lease agreement Rendezvous Grand Hotel Singapore is a modern 4.5 star hotel with 298 rooms located at Bras Basah. The REIT manager and the sponsor are evaluating the proposed transactions and the REIT manager is exploring options to finance the proposed acquisition. We have not incorporated the proposed transactions into our model since no definitive agreements have been executed.
Visible and substantial pipeline
The proposed acquisition of Rendezvous Grand Hotel Singapore is in addition to the three hotels and four serviced residences which have been identified by the sponsor as Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust.
Downgrade to a HOLD
Rolling forward our RNAV model to FY13F, and using more conservative capitalization rates given a more cautious outlook for tourism in 1H13, we reduce our fair value from S$1.08 to S$1.02, and downgrade FEHT from Buy to a HOLD.
FE-Htrust – DBSV
Growing its Singapore presence
- Proposed acquisition of Rendezvous Grand Hotel Singapore and accompanying retail wing
- A value accretive deal in our view with synergies to be extracted from an enlarged Singapore presence
- BUY, TP S$1.10 based on DCF
Proposed acquisition of Rendezvous Grand Hotel Singapore and accompanying retail wing. Recently refurbished and re-opened, the 298-room Rendezvous Grand Hotel Singapore is well located near the central commercial and cultural district in Bras Basah Road. This proposed acquisition will further deepen the trust’s already entrenched position as one of Singapore’s largest hotel owners. This deal will be keenly watched as this is the manager’s maiden deal post IPO and will be a gauge of their ability in driving synergies between this new hotel and its existing portfolio.
Likely to be a value accretive deal. No financial details are disclosed at this point. Using available data and industry averages as a guide, based on our estimates, the property (hotel and retail wing) could be valued at close to S$277.8m-S$292.0m, implying an initial yield of c5.6-5.9%, which is higher than FEHT’s current implied yield of c5.4%. Hence, this deal is likely to be accretive. We note that FEHT’s non-credit rated status means debt-funded headroom of c.S$200m (to 35% gearing ratio). As such, we believe the manager could consider obtaining a credit rating in order to improve the trust’s financial flexibility and move above the 35% gearing threshold in the near term.
BUY, TP S$1.10. We have kept our numbers intact and not factored in this acquisition pending further details for this deal. At current levels, FEHT offers an attractive 6.1-6.3% yield with potential upside to our numbers upon completion of this deal. Maintain BUY.
FE-HTrust – OCBC
Far East Hospitality Trust: Largest pure Singapore hospitality REIT
- Pure Singapore hospitality play
- Strong sponsor
- Clear and sizeable pipeline
Largest diversified hospitality portfolio by asset value
Far East H-Trust’s portfolio consists of 11 properties in Singapore, including seven hotels and four serviced residences, with 2,531 rooms/units in total. The trust has the largest diversified hospitality portfolio in Singapore by asset value, equaling S$2.14b. With a mix of hotels and serviced residences, the portfolio is able to ride on the up-cycle in the hotel industry, while the serviced residences would provide downside protection during economic slowdowns due to the longer average stay. We note that the hotels have good locations, with the majority located in the Core Central Region. Five of the hotels are close to private hospitals, enabling them to benefit from anticipated growth in Singapore’s healthcare tourism.
Positive outlook for the Singapore hospitality sector
For 2012-2014, we estimate that the overall hotel room demand in Singapore will grow at 6.4% p.a., outstripping expected hotel supply growth of 4.8% p.a. On a combined basis, we see Mid-tier and Upscale hotel room supply growing at 4.8% p.a.
Credible and experienced sponsor
The Sponsor is part of Far East Organization, which is the largest private property developer in Singapore. Far East Organization has developed real estate in the residential, hospitality, commercial, medical and industrial sectors. It has substantial experience managing hospitality assets and its total hospitality portfolio (including the initial portfolio of the Far East H-Trust) comprises 18 properties valued at more than S$3.0b as at 31 Dec 2011. The hospitality operations have also established three inhouse brands – Village, Oasia and Quincy.
Visible and substantial pipeline
Three hotels and four serviced residences have been identified by the Sponsor as Sponsor Right of First Refusal (ROFR) properties which could be offered to Far East H-Trust. These properties, if acquired could increase the number of hotel rooms/serviced residence units in the trust by 1,242 rooms/units, or 49.1%, to 3,773.
Initiate with BUY
We initiate with BUY and a RNAV-based fair value of S$1.08.
Hospitality REITs – DMG
More investment options in tourism space
Historically, the de facto proxy for the hospitality sector has been CDL Hospitality Trusts due to its liquidity and size. With the proliferation in recent hospitality REITs listings, investors will have more choices to play the tourism theme going forward. Ascendas Land recently listed its maiden hospitality trust comprising 10 hotels in Australia, China and Japan in a S$385m listing, offering 437.3m units at S$0.88 each. Meanwhile, Far East Hospitality Trust (Far East HT) is offering 706m units at S$0.93 each to raise S$656m, which will have an initial portfolio comprising seven hotels and four serviced residences worth S$2.1b. These REITs derive the majority of their asset values and income from Singapore and Australia, two markets with favourable demand-supply outlook, with rising tourist arrivals that should drive up room rates and occupancies further.
Buoyant outlook for Singapore hospitality space. CDL HT and Far East HT are both leveraged to the Singapore tourism market, deriving over 80% of revenue from Singapore. Both trusts should continue to benefit from the rising tourist arrivals to the city state, which reached a historical high of 13.2m arrivals last year and is poised to attract 14-15m visitors this year. A host of new attractions, together with the integrated resorts and a growing MICE market should ensure that room demand continues to lead supply, driving high occupancies and room rates. The Singapore Tourism Board (STB) expects tourist arrivals to reach 17m by 2015 (representing 6.9% CAGR during FY11-FY15).
Outlook for Australia hospitality underpinned by favourable demand-supply dynamics. In Australia, the market is equally buoyant, driven by a resilient domestic corporate travel market and rising tourist arrivals from Asian markets such as Japan and China. Due to high replacement costs, new supply in the country is limited and has helped to keep occupancies in gateway cities above 80%. The above trends are favourable for Ascendas HT, which have seven hotels in Australia accounting for 70% of its assets.
Our key picks: CDL HT and Far East HT. The forward yield for Ascendas HT is the highest among the three at 8.0%. Concurrently, CDL HT is trading at FY13F yield of 6.5% while Far East HT trades at 6.3% yield. Yields aside, we believe other important factors to consider include cost of funding, track record of the sponsor, growth of the underlying markets and attributes of the underlying properties. In this regard, we consider CDL HT and Far East HT as having superior risk-adjusted returns. Currently, we have BUY recommendation for CDL HT (BUY, TP S$2.20), a positive view on Far East HT and a neutral view on Ascendas HT.