Far East Hospitality Trust - CIMB Research 2018-04-26: 1Q18 Encouraging Read-Through For Peers

FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - 1Q18 Encouraging Read-through For Peers

Far East Hospitality Trust (FEHT)'s 1Q18 DPU of 0.94 Scts (+1.1% y-o-y) was slightly above consensus expectations but in line with our expectation, at 22% of our full-year forecast.
We expect stronger quarters ahead with inorganic contribution from Oasia Hotel Downtown (acquisition completed on 2 Apr 2018).
Hotels’ RevPAR improved 3.3% y-o-y and we believe that recovery for hotels is firmly on its way. As expected, SRs’ RevPAU rebounded 7.6% y-o-y due to low-base effect.

A firm hotel recovery, full-room inventory, ability to start pricing up rooms and new contribution from acquisition leads us to project 8.9% y-o-y growth for FY18F DPU.
Maintain ADD with unchanged DDM-based Target Price.

Far East Hospitality Trust (FEHT)'s 1Q18 DPU improved 1.1% y-o-y on higher contributions from hotels and serviced residences (SRs). This was partially offset by lower revenue from commercial premises (- 3.9% y-o-y).
The results validate our view that recovery for hotels is firmly on its way and is an encouraging read-through for the Singapore-focused hospitality REITs.

RevPAR improved 3.3% y-o-y on the back of increase in average occupancy (+1.5% pt to 89.6%) an +1.6% y-o-y in average daily rate (ADR). With the exception of Orchard Parade (was undergoing renovation), all hotels registered y-o-y improvements in RevPARs.
With demand expected to stay healthy (Singapore Tourism Board forecasts 1-4% growth in visitor arrivals; 2018 would see return of biennial events) and new supply at 1.2% of room stock, we continue to project 7%/5% y-o-y improvements in industry RevPAR/FEHT.

Given that FEHT managed to find replacement contracts to backfill one of the departed corporates (leading to a 10.1% pt y-o-y rise in occupancy to 81.3%), RevPAU increased 7.6% y-o-y, partially offset by a 5.8% decrease in ADR.
With corporate demand remaining soft, we expect Service Residences (SRs) recovery to lag hotel. For FY18F, we forecast 2.5% y-o-y improvement in RevPAU as SRs recover from a low-base.
FEHT will focus on raising occupancy for SRs during the year.

Revenue from commercial premises declined 3.9% y-o-y on lower rental rates while occupancy hovered at c.90%. We understand that FEHT would focus on increasing utilisation at office suites at Orchard Parade and retail spaces at Rendezvous Gallery.

While any form of supply is a negative, the manager is not unduly worried about Urban Redevelopment Authority’s (URA) proposal for short-term stay given high thresholds such as the 80% consent and annual 90-day rental cap. On the flip side, the manager could lobby for the same treatment for its SRs.
Currently, the minimum stay for SRs is seven days. Additionally, its SRs focus on corporate business; it is also unlikely that they would be adversely affected by short-term home stays given their locations.

We leave our estimates/Target Price (S$0.79) unchanged and reiterate ADD on FEHT.
Coupled with the recovery in the industry, renovation at Orchard Parade has been completed and FEHT can now operate with a full inventory. In addition, FEHT could start to price up its hotel rooms as occupancy is full. New contributions from Oasia Hotel downtown would also come in 2Q18.
Altogether, we forecast an 8.9% y-o-y growth in FY18F DPU.
Slight drags could come from SRs and the commercial premises.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2018-04-26

SGX Stock Analyst Report ADD Maintain ADD 0.790 Same 0.790