SINGAPORE (Jan 15): CIMB is maintaining its “add” call on Far East Hospitality Trust (FEHT) with a target price of 82 cents.
This came on the back of the trust announcing on Jan 12 that it will be acquiring the Oasia Hotel Downtown from its sponsor for $210 million.
Sponsor Far East SOHO a member of the Far East Organisation group of companies, is selling the 65-year leasehold estate in Oasia Hotel Downtown, a 314-room upscale hotel in Tanjong Pagar, under its right of first refusal agreement with FEHT.
See: Far East Hospitality REIT acquiring Oasia Hotel Downtown from sponsor for $210 mil
The purchase consideration is a 3.7% discount to the average independent valuation.
Entry NPI yield for the property is 4.6%. Inputting 2.5% interest cost, the manager expects a 4% DPU accretion from the acquisition.
In a Friday report, analyst Yeo Zhi Bin says, “We note that FEHT’s leasehold interests in the property is 65 years. Nonetheless, the $210 million price tag translates to about $669,000/key, which is attractive compared against past transactions and current asking prices.”
The acquisition is expected to be completed in April and upon completion, the trust’s manager expects gearing to increase to about 37.5% compared to 32.1% recorded in 9M17.
As part of the acquisition, an additional $15 million worth of units will be issued to the vendor of the NPI if the NPI of the property is at least $9.9 million for two straight fiscal years.
Yeo calculates that RevPAR would have to reach $177 to meet the NPI condition of $9.9 million, which he believes will be easily met.
“Aside from attractive price tag and significant growth potential from the asset, we note that Oasia Downtown gives FEHT a foothold in the CBD market and increases its exposure to upscale hotel segment and corporate customers,” says Yeo.
Also, the earn-out agreement helps in a lower upfront payable and fosters stronger alignment in interests between sponsor and the REIT.
As at 10.51am, units in FEHT are trading at 72 cents or 0.8 times FY18 book with a dividend yield of 6.05%.
