Far East Hospitality Trust - DBS Research 2018-04-27: On Cusp Of Recovery

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FAR EAST HOSPITALITY TRUST Q5T.SI

Far East Hospitality Trust - On Cusp Of Recovery

• Far East Hospitality Trust (FEHT)'s 1Q18 DPU of 0.94 Scts (+1% y-o-y), the first y-o-y increase in over 8 quarters.
• RevPAR for hotels and serviced residences rose 3% and8% y-o-y respectively.
• Improvement to continue as supply pressures ease inthe hotel space.

Past the cyclical low.

• We maintain our BUY call with a Target Price of S$0.76 for Far East Hospitality Trust (FEHT). 
• We believe 2017 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 of FEHT higher. FEHT is also attractively priced, trading at c.0.80x P/BV and offering a decent 6.5% forward yield.

Where we differ – Recovery from 2018.

• Consensus has a HOLD recommendation on FEHT given uncertainty over the sustainability of its distributions. While acknowledging the challenges faced by FEHT’s serviced residences following the reduction in the minimum stay for residential buildings from 6 to 3 months, in our view, this risk has been priced in given that FEHT already trades at a significant discount to book value and the serviced residences only represent c.12% of revenue. 
• We also believe consensus is ignoring the expected recovery in the Singapore hotel portfolio demonstrated by 4% y-o-y increase in revenue per available room (RevPAR) in 1Q18, which translated to the first y-o-y increase in DPU in over 8 quarters.

Upside from acquisitions.

• After the recent acquisition of Oasia Downtown, we understand FEHT remains engaged with its Sponsor on potential acquisitions. Any acquisition provides further upside to our earnings and DPU estimates.

Valuation:

• We maintain our DCF-based Target Price of S$0.76. 
• With over 13% capital upside and 6.5% yield, FEHT offers an attractively priced exposure to the recovering Singapore hotel market.

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 - At the start of a turnaround

First y-o-y increase in DPU in 8 quarters

• FEHT delivered the first y-o-y increase in DPU in over 8 quarters, with 1Q18 DPU coming in at 0.94 Scts (+1% y-o-y). However, this was a touch below our expectations, with 1Q18 DPU representing 23% of our original FY18F DPU.

Increase in RevPAR in both hotels and services residences

• Pleasingly FEHT’s hotels and serviced residences showed a turnaround.
• 1Q18 hotel RevPAR jumped 3% y-o-y to S$139 on the back of 1.5ppts and 2% y-o-y increase in occupancy (89.6% versus 88.1% in 1Q17) and average daily rate (ADR; S$155 vs S$152 in 1Q17). FEHT’s hotels benefited from an overall pick-up in demand and the uplift from the biennial Singapore Airshow in February 2018 despite the ongoing renovation at its Orchard Parade Hotel. Furthermore, the improved hotel performance was also attributed to greater number of guests from South Asia and North Asia which offset declines from the Oceania region.
• RevPAR for the serviced residences rose 8% y-o-y to S$174 albeit of a low base given RevPAR fell 14% y-o- y in 1Q17. In 1Q18, FEHT’s serviced residences recorded a 10.1ppts improvement in occupancy to 81.3% which was partially offset by 6% drop in ADR to S$214. FEHT reported that while there was an increase in group bookings, corporate demand remained subdued. Over the quarter, FEHT saw better demand from the Banking & Finance as well as the Oil & Gas sectors.
• Meanwhile, contribution for the commercial space (office/retail) was relatively flat y-o-y.
• Owing to the improved hotels and serviced residences, 1Q18 RevPAR and NPI both rose 4% y-o-y.

Steady gearing but expected to rise

• Gearing was relatively steady at c.35%. However, following the acquisition of Oasia Downtown, which will be mainly debt funded, we expect gearing to climb, settling at between 37-38%.
• FEHT’s average cost of debt was also stable at 2.5% with c.41% of its borrowings on fixed rates. Post balance date, the percentage of fixed rate debt is expected to climb towards 47% as FEHT has entered into additional interest rate swaps.
• In terms of debt refinancing this year, FEHT has already refinanced S$65m and S$67m of term loans ahead of their maturity in August 2018. These new loans have been termed out, now expiring in 2023 and 2025 respectively.
• Finally, FEHT’s NAV per unit remains at S$0.87.

Boost to earnings from debt funded acquisition of Oasia Downtown hotel over the coming quarters

• We had earlier assumed that FEHT would buy the 314-room Oasia Downtown Hotel for c.S$250m (around S$800k per key), partially funded with a S$70m equity raising in mid-2018. However, FEHT completed the acquisition for the hotel for S$210m in April and the acquisition was mainly debt funded.
• Consequently, we raised our FY18F and FY19F DPU by 5% and 2% respectively. The boost to FEHT’s DPU was partially offset by lower assumed serviced residence ADR given heightened competition from residential developments, which can now be leased out for a minimum of 3 months down from 6 months previously. For FY18, we now assume 2% fall in ADR versus 3% increase previously. Our DCF-based Target Price of S$0.76 was maintained.

Oasia Downtown overview

• Oasia Hotel Downtown is a 314-room upscale hotel located in Tanjong Pagar and part of a 27-storey hotel- cum-office development with a remaining 65-year lease tenure. The property is located within walking distance to the Tanjong Pagar MRT. Tanjong Pagar is set to transform into Singapore’s next waterfront city.
• For 9M17, Oasia Hotel Downtown’s RevPAR stood at S$170, which is below the industry average of S$184 and the upscale average of S$224. Therefore, there is an opportunity to increase RevPAR as occupancy rates stabilise and room rates are driven higher as awareness of the property is still relatively low given the hotel was only completed in 2016.
• FEHT will enter into a master lease agreement with its Sponsor for an initial 20-year term with an option for a further 20 years. This is a similar arrangement with FEHT’s other assets.
• Under the master lease agreement, FEHT will receive a fixed rent of S$6.5m per annum with a variable rent pegged to 33% of the hotel’s gross operating revenue and 25% of gross operating profit less the annual fixed rent. The fixed rent is approximately 63.6% of the total rental payment of the property for 9M17.
• Post the completion of the acquisition, an additional S$15m worth of units will be issued to FEHT’s sponsor if the NPI of the property is not less than S$9.9m for two consecutive fiscal years during the earn-out period (date of completion of the acquisition up to 31 December 2023 or extended expiry date of 31 December 2025).
• Valuation of the property seems reasonable at S$669k per key based on the initial S$210m or S$716 per key including the earn out payment. This compares to market transactions of more than S$750k per key, albeit Oasia Downtown has a land lease of only 65 years.

Maintain BUY with Target Price of S$0.76

• With positive signs that FEHT has started to turnaround, we reiterate our BUY call and Target Price of S$0.76.
• We believe the recent correction in FEHT’s share price is an opportunity as it now offers a 6.5% yield ahead of a multi-year recovery in the Singapore hotel market.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2018-04-27

SGX Stock Analyst Report BUY Maintain BUY 0.760 Same 0.760