Far East Hospitality Trust - CIMB Research 2017-02-22: 4QFY16 difficult to see a recovery in 2017

FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - 4QFY16 difficult to see a recovery in 2017

FEHT's FY16 DPU of 4.33 Scts (-5.9% yoy) was in line with our expectations, at 100% of our full-year forecast. 4Q16 DPU of 1.12 Scts (-4.3% yoy) was at 26%.
The 4Q16 results reaffirm our view that a recovery is not likely to happen until 2018.
For FY16, hotel RevPAR declined 5.3% yoy to S$139. Serviced residences’ RevPAU decreased 5.8% yoy to S$189.

We reduce our FY17-18F DPU by 1.8-2.4% on lower RevPAR assumptions. We also introduce our FY19F forecast.
Unabated new supply would continue to weigh on RevPAR in 2017. Reiterate Hold with a slightly higher DDM-TP as we roll forward our valuations.

The 4Q16 results reaffirm our view that the green shoots of recovery for the hospitality sub-sector will only appear in 2018. 4Q16’s revenue and NPI fell 4.6% yoy and 5.4% yoy, respectively, due to reduced contributions from hotels and serviced residences (SR) and softer retail and office revenue. As a result, distributable income and DPU dropped 2.3% yoy and 4.3% yoy, respectively.
Dragged largely by Village Hotel Changi (factoring in weaker operating performance), the trust made a devaluation loss of S$29.5m.

Hotels' 4Q16 RevPAR fell 7.3% yoy in 4Q16, roughly in line with the shaper contraction experienced by peers in the quarter.
For 2016, hotels' RevPAR declined 5.3% yoy to S$139. FY16 occupancy of 87% (+1.6% pts yoy) was achieved on the back of cuts in average daily rates (-7% yoy to S$159).
The trust could commence phase three AEI of Orchard Parade (refurbishment of guest rooms) in 2Q17.
Construction of the 30%-held Outpost Hotel Sentosa and Village Hotel Sentosa is on-budget and expected to be completed in 2019.

SR's 4Q16 RevPAU declined 2.3% yoy, marginally better than ART's c.5% yoy decline in the quarter.
Boosted by the completion of AEI at Regency House, average daily rate (ADR) inched up 1.2% yoy.
For 2016, SR's RevPAU fell 5.8% yoy to S$189. Occupancy dropped 2% pts yoy to 85% while ADR declined 3.6% yoy to S$222. Corporate demand remained soft, with the segment contributing to 85% of revenue in 4Q16 vs. c.90% a year ago.

As at end-16, FEHT’s gearing stood at 32.1%. Average cost of debt was 2.5% (flattish qoq), with 71% of borrowings hedged at a fixed interest rate.
A relatively higher debt tower of S$292m is due in 2017, of which, the manager has refinanced S$250m of term loans into 4- and 7-year loans. Documentation work was completed in Jan 17 and the loans are expected to be drawn down in Mar 17.

In terms of acquisition outlook, the trust is monitoring Oasia Downtown as the asset stabilises.
With a 5.8% yoy increase in room supply for 2017 (vs. +4.3% yoy in 2016) and lacklustre corporate demand, we expect RevPARs of our hospitality coverage to further edge downwards for 2017, but at a smaller magnitude vs. 2016. Hence, we maintain Hold and a slightly higher DDM-TP (S$0.57) as we roll forward our valuations.
Upside/downside risks hinge on the pace and magnitude of a recovery in the sub-sector.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-02-22

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