Far East Hospitality Trust's (FEHT) joint venture to develop a $443.8 million hotel project in Sentosa would be good for its credit rating despite oversupply risks, Fitch Ratings said yesterday.
The credit rating agency said in a report that the hotel joint venture was "on balance, credit-positive" for the trust.
The trust has a 30 per cent stake in the joint venture with its sponsor, Far East Organisation, to develop the 850-room Sentosa project.
The development has two hotels. The 620-room Village Hotel Sentosa is aimed at the mid-tier segment and the 230-room Outpost Hotel Sentosa will be more upscale.
Fitch said that teaming up with its sponsor to develop a property would help the trust to "lock in lower investment cost, compared with buying the property" from Far East Organisation after it is completed, which would be more expensive.
The agency also said that if the trust buys its sponsor's 70 per cent stake when the hotel project is completed in 2018, the acquisition would "meaningfully improve" the trust's risk profile by diversifying its assets and revenue sources.
"The project is also likely to increase shareholder value in the long run, given its attractive investment cost," Fitch said.
Risks of hotel oversupply do exist. The project could bump up the number of hotel rooms in Sentosa by nearly 30 per cent, which may depress room rates and occupancy at hotels until tourist numbers catch up, it added.
However, Fitch said that since the project will be only the fourth heritage property on Sentosa, which has 16 hotels, that could "help offset a degree of supply risks".
Another risk is that the development costs could go over budget, but Far East Organisation has a track record of completing its projects "largely on time and within budget", Fitch said.
It estimated that the trust's loan-to-investment property value (LTV) ratio, a measure of debt, will remain below the 40 per cent level even if the trust buys the completed hotel property and even if the property value does not appreciate from its cost price. This was still "comfortable" but Fitch would consider downgrading the trust's credit rating if the trust's LTV ratio exceeds the 40 to 45 per cent level, it said.
Far East Organisation won the heritage hotel site in Artillery Avenue in March this year for between $100 million and $150 million. This sum includes an upfront land premium of $32 million plus annual "rent" payments over the site's 60-year lease.
This article was first published on Sep 27, 2014.
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