FAR EAST HOSPITALITY TRUST
Q5T.SI
Far East Hospitality Trust - Sir, Your Room Is Ready
- For a tactical trade, we recommend investors switch from CDL Hospitality Trusts (CDREIT) to Far East Hospitality Trust (FEHT), which offers projected c.4% total returns vs. CDREIT’s projected c.0% total returns.
- Other than relative valuations, we believe that there could be near-term catalysts.
- FEHT’s healthy gearing allows scope for acquisitions, in our view.
- On a qoq basis, we expect its 2QFY17F to hold up with qoq improvement in serviced residences’ occupancies and yoy stable hotel performance.
- On an “as is” basis, we keep our Hold call with a higher DDM-based Target Price (S$0.63). Upside risk springs from potential accretive-acquisitions. Downside risk from weaker Singapore.
Tactical trade: switch to FEHT
- We reviewed our call and forecasts on CDREIT (CDL Hospitality Trusts: Sir, It's Time To Check Out - Rating: Hold, Target Price: S$1.52) and projected total returns of c.0% (share price upside/downside + dividend yield). We note that CDREIT is the only hotel S-REIT which is trading above book value, which suggests that the Singapore hotel recovery story has been priced in.
- For a tactical trade, we recommend investors switch to FEHT, which is trading at 0.72x current P/BV and 6.4% FY18 dividend yield. We project relatively better returns of c.4% for FEHT vs. CDREIT’s projected c.0% total returns.
FEHT’s healthy gearing allows scope for acquisitions
- Other than relative valuations, we believe that there could be near-term catalysts. With sponsor’s 314-room Oasia downtown likely to be stabilised, we believe that FEHT could look to acquire the property.
- Given that FEHT’s gearing at end-1Q17 stood at 32.3%, we believe that the manager could lean towards debt for any potential acquisition. Assuming fully-debt funded acquisition at 2.5% interest cost vs. NPI entry yields of 4.5-6% for acquisition size of S$225m-300m, we estimate 4.5-12% accretion to FY18F DPU.
More on Oasia Hotel Downtown
- The 314-room Oasia Hotel Downtown (Oasia Downtown) is a business hotel located in the downtown Tanjong Pagar area, which houses a hive of business, commercial and residential activities. We consider the hotel as straddling between the mid-tier and upscale segments.
- Connectivity is good with Tanjong Pagar MRT right at its doorstep. The property stands out in its locale with a unique silhouette covered by a lush green façade that is a massive vertical garden.
- Oasia Downtown officially opened in Apr 2016, and we believe the property has stabilised. In line with market transactions, we believe that price per key for the hotel could be in the range of S$800k-1m.
Potential impact of new acquisitions on gearing and DPU
- We read FEHT’s introduction of DRP (distribution reinvestment plan) in 1Q17 as clues for a potential acquisition. Given that FEHT’s gearing stood at 32.3% (at end-1Q17), we believe that the manager could lean towards debt for any potential acquisition. Assuming a 40% cap on gearing, we estimate available debt headroom of S$327m.
- Based on a scenario of FEHT acquiring S$225m-300m of new assets and assuming the new assets are fully debt funded at 2.5% interest cost (which is around the trust’s weighted average cost of debt); and NPI entry yields of 4.5- 6.0%, we estimate a 4.5-12% accretion to FEHT’s FY18F DPU.
- For FEHT, we calculated that a 1% accretion in DPU would translate into a c.1% increase in our DDM-based target price for FEHT.
We believe 2QFY17F could hold up
- On a qoq basis, we expect 2QFY17F results to hold up. We expect a qoq improvement in serviced residences’ (SRs’) occupancies as well as a low-to-mid single digit decline in hotel RevPAR (1Q17: RevPAR declined 4.6% yoy). Recall that 1Q17 results miss was due more to weakness from SRs than hotels.
- FEHT’s SRs' RevPAU fell 14% yoy in 1Q17 vs. ART's -11% yoy in the same period. The weakness was partially due to non-renewal of a key corporate account at one of FEHT’s SRs. We understand that the corporate had hired local staff instead of sending headcount over. Accordingly, occupancy for SRs dropped 13.1% pts yoy to 71.2% in 1Q17. However, we understand that there have been some improvements since, and we expect a better performance from SRs in 2Q17F.
- Meanwhile, FEHT’s hotels’ RevPAR declined 4.6% yoy in 1Q17. Though aaverage occupancy was maintained at 88.1%, this came at a cost of lower average daily rate (ADR), which declined by 4.7% yoy.
- FEHT's 1Q17 performance somewhat jives with 1Q17 STB (Singapore Tourism Board) data, which showed that mid-tier hotels suffered the worst (-4.1% yoy for 1Q17) while luxury performed the best (+5% yoy for 1Q17).
- Some of our optimism for a relative stable hotel performance is due to low-base effects. FEHT recorded a RevPAR of S$136 for 2Q16 (-7.5% yoy), which is around 1Q17’s S$134. Our channel checks also revealed that May was a relatively better month in the quarter as Singapore hosted more MICE events such as CommunicAsia 2017.
- Meanwhile, Apr was generally a difficult month for hotels. Also, as FEHT is slightly more skewed towards leisure demand, we believe that it could benefit from a shift in Hari Raya Puasa dates. Hari Raya Puasa was in Jul last year but it falls in Jun this year.
Singapore hospitality market to bottom out by end-17F
- We reiterate our view for the Singapore hospitality market to bottom out by end-17F and recover in 2018F. That said, the path to recovery is never smooth. We now expect FEHT’s hotel portfolio to post 4.4% yoy RevPAR decline for FY17F, and 3% yoy improvement for FY18F.
- The outlook for SRs, however, is more tempered. We now expect SRs to post 7.8% yoy RevPAU decline for FY17F, and 5.6% yoy improvement for FY18F.
- With the change in assumptions, our FY17F-19F DPUs decrease by 0.9-1.8%.
Maintain Hold with a higher DDM-based TP
- On an “as is” basis, we maintain our Hold call on FEHT with a higher DDM-based TP of S$0.63 (due to sector-wide decrease in Singapore discount rate). However, we believe that near-term catalysts such as accretive-acquisitions could improve FEHT’s total returns.
- In terms of P/BV, it is also the most valued hotel S-REIT, at 0.72x current P/BV vs. sub-sector average of 0.91x P/BV.
- For a tactical trade, we recommend investors switch from CDREIT to FEHT, which offers projected c.4% total returns vs. CDREIT’s projected c.0% total returns.
YEO Zhi Bin
CIMB Research
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LOCK Mun Yee
CIMB Research
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http://research.itradecimb.com/
2017-06-14
CIMB Research
SGX Stock
Analyst Report
0.63
Up
0.570
