Wednesday, December 03, 2014

OUEHT’s $495m Acquisition To Boost Yields?

Last week, OUE Hospitality Trust (OUEHT) announced its decision to acquire Crowne Plaza Changi Airport (CPCA) and its extension (CPEX) from OUE. OUE is also OUEHT’s vendor and sponsor. 

The properties will be purchased for a consideration of $290 million and $205 million respectively. InterContinental Hotels Group will continue to be the manager of the hotel after the acquisition. 

CPCA which is located beside Changi Airport Terminal 3 has 320 rooms and has been in operations since 2008. 

CPEX will be located beside CPCA and connected through a link bridge will add 243 rooms to the airport hotel bringing it to a total of 563 rooms. The extension is expected to be completed by end of 2015. 

This acquisition will be split into two phases with CPCA first, followed by CPEX after it has obtained its temporary occupation permit. To have a better projection of the hotel operations after expansion, the acquisition of CPEX will be priced now. 

OUEHT expects CPCA to have an annualized yield of 4.5 percent and a combined yield of 4.6 percent post expansion. The acquisition will be funded through debt and/or equity, with the decision for which funding to pursue decided during the upcoming AGM of OUEHT. 

Like its other hotel, OUEHT will lease the airport hotel back to its vendor under a Master Lease agreement composing of a fixed and variable rent based on performance of the property. 

CPCA will have a fixed rent of $12.5 million while the post expansion hotel will have a fixed rent of $22.5 million. This agreement will expire in May 2028 with the vendor having an option to renew the lease for an additional two consecutive five years term. 

In view of this development, analysts from OSK-DMG Research upgraded OUEHT to a “Buy” call with a higher target price of $0.97. They cited the yield accretion and the opportunity for the trust to own a global brand name hotel asset as the main reasons for rerating.

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