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Far East Hospitality Trust unveils first acquisition after listing

ON the day Far East Orchard announced its intention to buy Straits Trading Co (STC)'s hospitality management business, Far East Hospitality Trust (Far East H-Trust) said it would offer to acquire STC's sole hotel in Singapore, the 298-room Rendezvous Grand Hotel on Bras Basah Road.

Under a non-binding memorandum of understanding signed with STC, Far East H-Trust, which listed on Aug 27, intends to buy a leasehold stake in the 4½-star hotel as well as its retail component, Rendezvous Gallery Singapore, which has three floors dedicated to dining.

Its sponsor, Far East Organisation, will consider acquiring the remaining leasehold on the entire property not bought by the trust. As part of the proposed agreement, Far East H-Trust will grant Far East Organisation a master lease on the hotel. The property went through a refurbishment exercise in early 2011 and reopened for business last December.

FEO Hospitality Asset Management, which manages Far East H-Trust, is exploring options, including debt financing or the issuance of Far East H-Trust securities, to fund the acquisition. Financial details of the proposed transaction have yet to be finalised, and any definitive agreement will be inked only next year.

Gerald Lee, CEO of FEO Hospitality Asset Management, says the acquisition underscores Far East H-Trust's strategy to acquire third-party properties for growth. The trust's current portfolio consists of 11 Singapore properties, all from Far East Organization, with a total of 2,531 hotel rooms and serviced residence apartments worth about S$2.14 billion.

The trust has the right of first refusal to another seven hotels and serviced residences in Singapore belonging to its sponsor. They include Amoy Hotel, Oasia Downtown Hotel and The Outpost Hotel, all of which are under development. Amoy will be completed by 1H2013, Oasia by 2H2015 and Outpost by 1H2016. Its portfolio will expand 49% to 3,773 hotel rooms and serviced apartments if it exercises the right of first refusal.

"The proposed acquisition comes as a surprise, as we had expected Far East H-Trust to focus first on delivering organic growth as it rolled out asset upgrades, with acquisitions coming later," says Goldman Sachs. "Nevertheless, Rendezvous Grand Hotel fits into Far East H-Trust's existing mid-to-upscale hotel portfolio."

According to the broking house, the Bras Basah property could be worth S$209 million to S$238 million, based on the valuation of similar assets around the area. Given its gearing limit of 35%, the trust may need to raise S$34 million to S$53 million in equity to fund the purchase, it says. That would mean issuing 35 million to 55 million new units.

As the deal marks Far East H-Trust's maiden acquisition, DBS Vickers expects investors to track it closely. "The outcome will be used as a gauge of management's negotiation skills and business acumen in driving synergies with its current portfolio," says DBS, which estimates the value of the property at S$277.8 million to S$292 million, implying an initial yield of 5.6% to 5.9%. The acquisition is expected to be value-accretive, as the trust now trades at an implied forward yield of 5.4%, it adds.

This story first appeared in The Edge Singapore weekly edition of Dec 3-9, 2012.

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