FAR EAST HOSPITALITY TRUST
Q5T.SI
Far East Hospitality Trust - Upside From Buying Oasia Downtown
- Far East Hospitality Trust (FEHT)'s 3Q17 DPU of 1.03 Scts (-8% y-o-y) in line with expectations.
- Headwinds from additional DRP units and soft market conditions - as expected - but slight improvement in hotel RevPAR was a positive surprise.
- Expect 2% DPU accretion from anticipated acquisition of Oasia Downtown in mid-2018.
Past the cyclical low.
- While Far East Hospitality Trust’s (FEHT) share price has jumped 17% since our upgrade to BUY in May, we maintain our BUY call with a revised TP of S$0.76.
- We believe 1H17 marked the cyclical low in FEHT’s earnings and as the Singapore hospitality market enters an upturn in 2018, a recovering DPU trend should drive the stock price higher. FEHT is also attractively priced, trading at c.0.80x P/BV and offering a decent 5.8% forward yield.
Where we differ –
Recovery from 2018.
- Consensus is currently recommending investors to avoid FEHT given an expected near term decline in DPU. While acknowledging the downward pressure on FEHT’s earnings due to an oversupplied Singapore market, in our view, this risk has been priced in given that FEHT already trades at a significant discount to book value.
- In addition, we believe the market is ignoring the expected recovery in the Singapore hospitality market next year. The recovery had failed to materialise previously due to new supply being pushed back, which we do not expect to occur ahead.
Upside from acquisitions.
- We understand FEHT is engaging its Sponsor on potential acquisitions. With a low gearing of between 32-33% and FEHT initiating a dividend reinvestment plan (DRP) in which its Sponsor has participated in, we believe there is high chance of an acquisition in the next 12-18 months.
- Thus, we have priced in the purchase of Oasia Downtown for c.S$250m (around S$800k per key or 4.5% NPI yield), partially funded with a S$70m equity raising in mid-2018. This results in a c.2% accretion to our original FY18-19F DPU estimates.
Valuation
- After incorporating the acquisition of Oasia Downtown in mid- 2018, we raised our DCF-based TP from S$0.70 to S$0.76.
Key Risks to Our View
- The risk to our positive view would arise from a deep contraction this year or delay in recovery of the Singapore hospitality market next year.
WHAT’S NEW
Weak 3Q17 as expected; 3Q17 DPU of 1.03 Scts
- As expected, FEHT had a soft quarter with 3Q17 DPU down 8% y-o-y to 1.03 Scts.
- The decline in DPU was largely due to an increase in units on issue arising from the issuance of shares under the distribution reinvestment plan (DRP). In addition, the results were also negatively impacted by lower contribution from Serviced Residences and commercial operations (office and retail space). This also resulted in 3Q17 revenue and NPI each falling 2% y-o-y.
- Hotel RevPAR surprises on the upside but service residences still suffering and commercial premises disappointing The hotel portfolio delivered a positive surprise over the quarter with revenue per available room (RevPAR) up 0.4% y-o-y to S$143 versus our expectations of a dip. The improvement was largely driven by an increase in occupancy (89.4% versus 88.4% in 3Q16), which offset the 0.7% y-o-y fall in average daily rate (ADR) to S$159.
- Meanwhile, the service residence portfolio continues to be impacted by soft corporate demand. RevPAR fell 3.4% y-o-y to S$196 on the back of falls in both occcupancy (89% versus 90% in 3Q16) and ADR (S$221 versus S$226 in 3Q16). Nevertheless, the fall in RevPAR has moderated from the 14% and 5.7% falls recorded in 1Q17 and 2Q17 as FEHT has seen a slight improvement in demand across all sectors such as banking, services and even oil & gas.
- The commercial premises (retail and office space) had a disappointing quarter with 3Q17 revenue dropping 5% y-o-y. This was below expectations as we had expected a steady contribution following AEI works.
- We understand the fall was due to lower occupancy as FEHT refines its tenant mix, and there was also a marginal decrease in rental rates.
Dip in gearing stable
- Gearing dipped marginally to 32.1% from 32.8% in 2Q17 from debt repayments during the quarter.
- The average cost of debt was steady at 2.5%.
- However, the proportion of fixed debt fell to 41.7% from 71% previously as some interest rate hedges expired. As FEHT enters into new interest rate hedges, the percentage of fixed debt should rise back up to its historical 60-70% level.
- NAV eased slightly to 89.42 Scts from 89.71 Scts in 2Q17 due to the increase in the number of units outstanding.
Acquisition of Oasia Downtown
- We understand that FEHT has been in active discussions with its Sponsor about the potential acquisition of hotels from the ROFR pipeline.
- Thus, in anticipation of an acquisition, we have priced in the purchase of the 314-room Oasia Downtown for c.S$250m on a 4.5% NPI yield. The implied price per key would be c.S$800k, which is fair considering the quality and location of the asset.
- Completed in 2016, Oasia Downtown is located in Tanjong Pagar which is set to be transformed into Singapore’s next waterfront city with a hive of business, commercial, and residential activities. The nearby Tanjong Pagar MRT Station provides easy access to Raffles Place, Clarke Quay, Sentosa, Orchard Road, and Marina Bay.
- To fund the acquisition, which we have targeted to occur in mid-2018, we have assumed FEHT raises S$70m through an equity placement at S$0.68 per unit with the remainder to be funded with debt.
- Post the acquisition, we anticipate gearing to rise from c.32% to between 34-35%. In addition, we estimate a 2% accretion to our original FY18-19F estimates.
- We believe the market will react positively to this acquisition and support the capital raising as it improves the trading liquidity of the trust but also increases FEHT’s exposure to the Singapore hospitality market which could be at a start of 3-year upcycle.
Upping our DPU estimates with TP raised to S$0.76
- After incorporating the acquisition of Oasia Downtown and raising our RevPAR estimates for the hotel operations given better than expected year to date performance, but partially offset by a weaker contribution from the commercial premises, we raised our FY17-19F DPU by 0.4-2.8%.
- On the back of stronger earnings, we also raised our DCF-based TP to S$0.76 from S$0.70.
- Our TP implies a forward yield of 5.5% which is -1 SD below its mean. We believe a tighter yield can be sustained given the potential for FEHT to deliver DPU growth of between 5-6% p.a. over the next three years as the Singapore hospitality market recovers and it benefits from the acquisition of Oasia Downtown as well as the initial contribution from its 30% stake in a hotel development on Sentosa which is scheduled to open in phases starting from mid-late 2018.
Maintain BUY
- We maintain our BUY call with a revised TP of S$0.76.
- Despite the strong rally in FEHT’s share price year since we upgraded the stock to a BUY call in May, in our view, the rally still has legs to run.
- We believe the recovery in the Singapore hospitality market translating to strong DPU grow over the next three years should result in a multi-year rerating.
Melvin SONG CFA
DBS Vickers
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Derek TAN
DBS Vickers
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http://www.dbsvickers.com/
2017-11-03
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