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Saturday, 18 August 2012

Far East Hospitality Trust

Far East Hospitality Trust ("FEHT") is a Singapore-Focused Hotel and Service Residence Hospitality Trust. An update from an earlier blog posting, FEHT has priced its offering at the highest end of the range of 93 Singapore cents.The final prospectus is here if you need it. The initial portfolio will consist of 11 properties of seven hotels and 4 service apartments. The Sponsor is part of the Far East Organization.

FEHT's Market share
It is interesting to see the diagram on the left where it declares itself as having a leading market share for both service residences and mid tier hotels.

I think it is pretty important for REITs to have a good sponsor because it will be the source of 'future properties' to be injected into FEHT.

The key concern will of course to ensure that everything is done at arm's length between the related entities. They are keeping some interesting properties in the pipeline such as Orchard Parksuites, Orchard Scotts Residences and Oasis Downtown. mmm...wonder why aren't transferring those completed ones now... :-P

The annualized yield for FY2012 is 6% and that of FY2013 is 6.3%. The hotels are running at 85% occupancy rate and the service residence at 90% rate. I believe the tourism arrivals and business growth of Singapore will be key to ensure the rates continue to remain high. So it will be good for FEHT if Singapore continues to host the F1 and that the 2 Integrated resorts continue to pull in the tourist dollars.

The offer will close on 23 Aug 2012 at 12pm and commence trading on 27 Aug at 2pm. There will be over-allotment option and this allows for price "stablizing" action post IPO. In this regard, you can see that the share price being 'supported' if it drops below the IPO price.

The portfolio of properties are presented below:
Current Portfolio
and you can see the list of pipeline properties where FEHT will have the right of first refusal. Very interesting list.
Future Pipeline

I like Far East's ability to convert a residential block into The Quincy Hotel. I thought the hotel looked pretty interesting and cool. The Quincy hotel is well located but i can't say the same about the location of Changi Village Hotel...... When i was young, i always wonder why out of the blue there is a Le Meridien Hotel at the far end of Changi Point... and the old story goes that Far East built the hotel at the wrong side of Changi Airport in anticipation of its opening...hahaha not sure if that is true but in any case, if i have a choice, i will kick this asset out but unfortunately we can't pick and choose here. There are no freehold hotel properties in the portfolio. All the properties are on less than 99 years leasehold.

Value add skills?

Let's try to understand why property companies like to set up 'REITs'. You can say that Far East has been 'slow' to the game as companies such as Capitaland and CDL have made significant progress in this area. The reorganization of Far East starts when Lucas Chow joined Far East to unlock value for shareholders of Orchard Parade Holdings.

The REIT structure is a good way for the company to retain control of the assets and yet recycle capital by releasing the cash stuck in those assets. From an investors point of view, it is good to have a Sponsor with good assets and pipeline but at the same time, you are also concern that they will inject under-performing assets into the trust. But looking at the upcoming pipeline, FEHT should benefit from them. The only question then will be how will FEHT pay for the assets. Will it be raising more cash from existing unit holders or issuing new units to the owner of these assets. If it is the former, means you have to get cash set aside for 'rights issue', if it is the later, then hopefully the assets are yield accretive so that you are not diluted.

Now back to the IPO details. A total of 329.366m stapled securities or units will be offered (subject to over-allotment option) and 61.8m units will be for public tranche. As such you will have a 'higher chance' of getting this via the ATM. As mentioned in my earlier post, it is encouraging to see quality cornerstone investors subscribing to this IPO such as Aberdeen Asia, APG, NTUC income etc. These are typically long term investors who invest for the yields but unfortunately, they have also pushed up demand so much that the IPO is now priced at 93c, the highest end of the offering range. The over-allotment option is 65.8m shares. I guess this will be triggered and it will provide support for the IPO in the initial weeks. The market cap of FEHT will be around $1.5 billion.

FEHT will pay out 100% of income for FY2012 and 90% thereafter. The distributions will be made every quarterly. I will consider FEHT to be a very good candidate for my SRS portfolio if you want to receive stable distributions every 3 months.

Out of the 4 bookrunners, DBS has the lion's share and OCBC the least. No wonder OCBC cannot give me the placement securities i want... perhaps will hear good new from DBS?

Fair value

At 93c and FY2012 annualised yield of 6%, rising to 6.3% the following year, FEHT in my view, is fairly valued for this IPO. Its 2 listed competitors, CDL Hospitality Trust is currently trading at around 5.9% and Ascott Residence Trust at 7.2%. However, it may get a slight premium for being a 'leader' in this segment and with an interesting pipeline of assets being injected, the yield can probably go up going forward. The counter will probably trade between 85-100c assuming it trades between the bands of 5.5%-6.5% yields. Given the current good demand for yield stocks, in my view, a more likely trading range in the first week will be 95-100c. With Goldman Sachs in the picture, the prices should be well supported.

Chilli Ratings

Don't expect fireworks. This is a yield play after all. I would have given it a 2 Chilli ratings if it was priced below 90c but to give it a 1 Chilli rating wouldn't sound right either. As such, this is the first time i am giving a 1.5 chilli rating considering that it is fairly value with some upside bias. It can also be considered a candidate for a long term yield play if you believe that Singapore will continue to attract tourist $ in the foreseeable future.

Happy IPOing. If you want to punt this IPO, probably you can but may not be worth the effort unless you get 5 lots or more to make it worth the effort. I will most likely be allocated a small placement tranche and may consider it for my SRS portfolio together with some Ascott REIT.

Research Report (Post subsequently updated on 25 Aug 2012)

CIMB issued a report on 23 Aug 2012 with no rating. Attached here for your reading pleasure.


Anonymous said...

Hi, I follow your blog from time to time.

I applied for 500 lots placement from DBS during the bookrunning, and got 25 lots only (i.e. 5% allocation).

Not sure if my banker favoured other clients over me, but if the allocation is anything to go by, this should be well received.

I'll try my luck at the ATM too :)

2Y Capital said...

wow not bad ah.. 25 lots is a decent allocation. :)

Anonymous said...

I calculated using the newest dividend yield of CDL HTrust and realised it is 6.5% as of yesterday's closing price.

Thus, I think it will tend to match 6.5% rather than 5.9%.

There is a chance it may go up 20% as CDL H Trust is trading at 1.2 x pb

Thus, I think the price range is 0.86 to 1.11. Actually, I think there is a little valuation problem. The NAV may not be as right as it seems on the report. Because during this transaction, Far East H Trust actually overpay above the valuation of the properties. (Maybe because they need cashflow as they holding a lot of residential unit?? I am not sure on this, thus pls dont quote me).

Nevertheless, as the management is pretty good with big names like Koh Boon Hwee, Lucas and also STB chairman, it is not a bad company.

In terms of gearing it is 30% while CDL is 25%. Thus, Far East is much limited in terms of acquisition opportunities compared to CDL H Trust.

With so many residential serviced residences, I think there is a need to ensure foreign talents keep coming in. Without them, who have money to stay in these units? I doubt Singaporeans can afford the Serviced residences. Thus, I think policy from the government will affect them here. No doubt they will benefit from tourism. But with recent pessimism from Europe and China, it may not be all too good.

For me, I will consider CDL H trust over this as the yield is better after my calculations.

2Y Capital said...

wow... thanks for sharing... you dont leave your name so how to 'quote' you ah. hahaha :)

My 5.9% is sourced based on the latest price from Capital IQ... :) Can i know your DPS estimate for CDL HT for current year?

Anonymous said...

I took from the latest ppt on 1H2012 x 2. Most probably the DPS will rise as it is on an upward trend. With the coming F1 etc DPS can be maintained. Hence 6.33 x 2 / 1,93 x 100% = 6.55%.

The market will be a little off if it goes after Far East instead of the track record holder CDL H trust.

ecoinshore said...

Great write up

2Y Capital said...

Thks for your kind words.

venusinfrastructure said...

We Trust on your Hospitality.

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