Far East Hospitality Trust’s divestment of Central Square is ‘best strategy:’ CGS-CIMB

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Far East Hospitality Trust‘s divestment of the Central Square property is “the best strategy,” as the property faces a long redevelopment gestation period, CGS-CIMB said in a note last week.

City Developments plans to redevelop its Central Mall properties and the surrounding area into a large-scale mixed-use project and it has agreed to buy Central Square from Far East Hospitality Trust for S$313.2 million. Central Square, located at 20 Havelock Road in Singapore, is currently a 99-year leasehold development with serviced residence, office and retail space, with 72 years remaining on its lease.

Far East Hospitality Trust said the consideration was a 57.9 percent premium on the independent valuation of S$198.3 million as of end-2020, and a 70.8 percent premium on the original purchase price of S$183.3 million in 2012. FEHT said it expected to post an estimated net gain of S$112 million.

CGS-CIMB said Far East Hospitality Trust’s (FEHT) move to divest the property was not a surprise as the trust had said it was exploring options based on advice from the Urban Redevelopment Authority to redevelop the site.

Assuming around 84 percent of the proceeds are earmarked to pare down FEHT’s debt, its gearing will drop to 33.5 percent from 41.3 percent as of end-June, boosting its debt headroom, the CGS-CIMB note estimated.

“This will provide FEHT flexibility in acquisitions,” the note said. “Potential acquisitions post the divestment of [Central Square] would also help to offset some of the income weakness due to the pandemic.”

While Central Square was around 8 percent of FEHT’s 2020 assets under management (AUM), its divestment will boost pro forma net asset value (NAV) by 7.2 percent and distribution per unit (DPU) by 0.8 percent due to interest savings, CGS-CIMB noted.

CGS-CIMB rates FEHT at Add with a S$0.745 target price.

At least one other analyst was positive on the divestment.

SCCM Asia Research, part of SooChow CSSD Capital Markets (Asia), which publishes on Smartkarma, noted FEHT has been trading below book value since its listing — with the current level at 0.73 times price-to-book.

“This deal proves that its book value may be undervalued and management is finally able to monetize some of its old assets and potentially deploy it to higher yielding assets,” SCCM Asia Research said in a note Saturday.

While the unit price is down around 12 percent since mid-October, amid risks to re-opening caused by new virus variants, investors are getting an estimated yield of around 4.7 percent for fiscal 2022 in the lead up to a full reopening, the note said.

“Not a bad investment proposition, in our view,” SCCM Asia Research said.

Shares of Far East Hospitality Trust (FEHT) ended Friday at S$0.59, up 2.61 percent.