Far East Hospitality Trust to get boost from Oasia Hotel Downtown

Distribution per unit could increase 4% to 3.09 cents.

Far East Hospitality Trust's (Far East H-Trust) proposed acquisition of Oasia Hotel Downtown (OHD) for $210m will serve as a catalyst for growth and earnings, OCBC Investment Research said.

According to a report, against an annual net property income (NPI) of $9.6m, this represents a positive acquisition cap rate of 4.6%.

The acquisition will be largely funded by debt, and upon completion, the trust’s gearing will increase to 37.5%.

Meanwhile, the distribution per unit (DPU) for the nine months of 2017, would increase 4% from 2.97 cents to 3.09 cents.

The acquisition is still subject to the approval of stapled security holders at an extraordinary general meeting to be convened.

The asset will be master leased to Far East SOHO Pte. Ltd. for 20 years with an option to renew for another 20 years.

The terms include fixed rent of $6.5m per year and a variable rent comprising of 33% of the property’s gross operating revenue and 25% of gross operating profit minus fixed rent. If included in the 9M2017 gross revenue for Far East H-Trust, OHD’s gross revenue would make up 8.9% of the group’s total revenue.

Moreover, OCBC said the hotel has more potential for improvement of revenue per available room (RevPAR).

OHD’s RevPAR in 9M2017 was $170, which is below the hotel industry average of $201.2 across hotel tiers. Since it is considered an "upscale" hotel, it can reach the RevPAR average of $224.2 for upscale hotels in 10M2017.

OCBC analyst Deborah Ong said, "We note the upside potential for the asset’s operational performance, given 1) its strategic location within the CBD 2) solid reputation with a flurry of awards and positive reviews online 3) room for further growth with occupancy levels still in the low-80s."