Wednesday, April 17, 2013

Far East Hospitality Trust: 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. 


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