Far East Hospitality Trust - Maybank Kim Eng 2018-09-14: Rooms For Growth

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FAR EAST HOSPITALITY TRUST SGX:Q5T

Far East Hospitality Trust - Rooms For Growth

Best leveraged to Singapore rebound

• With its 13 mid-to-upscale hotels and serviced residences all located in Singapore, Far East Hospitality Trust (FEHT) is the only pure exposure to our expected rebound in the hospitality sector.
• Rising contributions from the recently-acquired Oasia Downtown, a 5% y-o-y annual recovery in hotel RevPARs and management fees from three Sentosa properties are expected to anchor its strongest 6% DPU CAGR in FY18-20E. We see upside potential from its higher Singapore RevPAR sensitivity and visible sponsor ROFR pipeline.
• Initiate coverage with a BUY and DDM-based SGD0.75 Target Price (COE 7.7%, LTG 2.0%).

Hotel recovery underway

• Far East Hospitality Trust (FEHT)’s hotel RevPAR jumped 6.9% y-o-y in 2Q18 as occupancy rose y-o-y from 87.1% and q-o-q from 89.6% to 89.8%. This was despite competition from new industry room supply. Excluding contributions from Oasia Downtown acquired in Apr 2018, RevPAR growth would have been maintained at 1Q18’s 3.8% y-o-y.

~ SGinvestors.io ~ Where SG investors share

• We see an improving operating outlook for its hotels in 2018, backed by 6M18’s 7.6% y-o-y increase in visitor arrivals. The latter has outpaced the government’s full-year 1-4% y-o-y growth projection, supported by major MICE and biennial events. Fundamentals look set to be strengthened further as earlier oversupply tapers off. ~ S G investors.io ~SGinvestors.io ~ Where SG investors share

Strongest 6% DPU CAGR

• With assets all structured as master leases, its hotels are arguably less responsive to RevPAR changes than Ascott Residence Trust (SGX:A68U) [Rating: HOLD, Target price: SGD1.15]. That said, we expect its Singapore hotel RevPARs to rise at 5% p.a., helped by the addition of Oasia Downtown and three hotels under development on Sentosa from 4Q18.
• RevPAU growth for serviced residences at 12% of its NPI is likely to be muted as staff relocations generally remain weak.
• ~SGinvestors.io ~SGinvestors.io ~ Where SG investors share

Higher gearing following debt-funded Oasia deal

• Far East Hospitality Trust (FEHT) is eyeing its sponsor’s visible ROFR pipeline of 1,767 rooms. Its aggregate leverage increased q-o-q from 35.1% to 40.3% as of end-Jun 2018 following its fully-debt-funded Oasia Downtown purchase.
• Acquisitions of interests in three Sentosa hotels held by its sponsor are possible in the medium term as these properties scale up.
• ~SGinvestors.io ~SGinvestors.io ~ Where SG investors share

Swing Factors 

Upside 

• Earlier-than-expected pick-up in corporate demand. 
• Better-than-anticipated RevPAR. 
• Accretive acquisitions where cap rates exceed cost of funds, or divestments at low cap rates which unlock asset values. 

Downside 

• Sizeable increases in hotel and SR room supply without commensurate growth in demand. 
• Deterioration in global economy, resulting in declines in RevPARs. 
• Sharper-than-expected rise in interest rates could increase cost of debt and affect earnings, with higher cost of capital lowering valuations. 

See also the SREIT Hospitality Sector Initiation Report : Singapore REITs - Checking In.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-09-14

SGX Stock Analyst Report BUY Initiate BUY 0.75 Same 0.75