Far East Hospitality Trust - OCBC Investment 2017-11-03: You Can Always Go… Downtown!

Far East Hospitality Trust - OCBC Investment 2017-11-03: You Can Always Go… Downtown! FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - You Can Always Go… Downtown!

  • Hotel RevPAR up 0.4% YoY.
  • Possibility of Oasia Downtown acquisition.
  • Maintain HOLD.

3Q17 results within expectations 

  • Far East Hospitality Trust’s (FEHT) 3Q17 results were within expectations. Gross revenue dropped 2.0% to S$27.5m. Hotel RevPAR increased 0.4% to S$143 in 3Q17 on marginally lower ADR. We would like to highlight that this is the first YoY increase clocked for the REIT since its listing.
  • Serviced Residences RevPAU decreased 3.4% YoY on the back of 1.0 ppt lower occupancy and 2.3% lower ADR. 
  • Revenue from retail and office spaces declined 4.5% YoY mainly due to lower occupancy. 
  • 3Q17 DPU dropped 8.0% YoY to 1.03 S cents or 26.1% of our full year forecast, which were within expectations. 9M17 DPU made up 74.3% of our full-year forecast.

Acquisition in the works? 

  • Management mentioned that discussions regarding the 314-room Oasia Hotel Downtown acquisition are proceeding well and we see the announcement of an acquisition before year-end or in early FY18 as a possibility. 
  • Given FEHT’s low gearing of 32.1% as at 30 Sep 2017 and an average cost of debt of ~2.5% currently, we believe the acquisition is likely to be yield accretive. Assuming that Oasia Hotel Downtown is acquired for S$1.2m per key at the start of FY18 at a 4.5% NPI yield and is funded 80% by debt and 20% by perps, this would add ~0.22 S cents to our FY18F dividend and ~4 S cents to our FV. 
  • As we update our model, we now assume a 75% chance of the acquisition being announced and completed by year-end.

1.5k rooms coming onto market in 4Q17 

  • With regard to FEHT’s current portfolio, we note that 4Q17 will likely be challenging for the REIT given that 1.5k hotel rooms are expected to enter the market. These rooms form ~60% of the 3.9 ppt increase in room supply expected for the whole year. With this in mind, we lower our projections for RevPAR and RevPAU growth in FY18. 
  • As we make adjustments and roll our estimates forward, our fair value dips slightly from S$0.66 to S$0.65. 
  • Against yesterday’s closing price, FEHT is trading at a 5.5% FY17F yield and 5.8% FY18F yield (without Oasia Hotel Downtown). 
  • We maintain HOLD on FEHT.

Deborah Ong OCBC Investment | http://www.ocbcresearch.com/ 2017-11-03
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 0.65 Down 0.660