Far East Hospitality Trust - DBS Research 2018-10-31: Turnaround Still Intact

FAR EAST HOSPITALITY TRUST (SGX:Q5T)

Far East Hospitality Trust - Turnaround Still Intact

Far East Hospitality Trust (FEHT)'s 3Q18 DPU of 1.05 Scts (+1.9% y-o-y) below expectations.
Hotel RevPAR jumped 7% but borrowing costs higher than expected while commercial portfolio earnings lagged our projections.
Serviced residences facing near term challenges, resulting in 5% y-o-y decline in RevPAR.
Moderating growth expectations for next year but DPU recovery on track.

We maintain our BUY call with a revised Target Price of S$0.70 for Far East Hospitality Trust (FEHT).
While moderation of growth expectations has led to a correction in FEHT’s share price over the past few months, we believe investor confidence should return as FEHT shows further evidence that DPU is on a recovery path. As new hotel supply eases over the next few years, we remain convinced that FEHT is leveraged to a multi-year upturn and FY19 earnings would also benefit from the full year contribution of the recently acquired Oasia Hotel Downtown.
Furthermore, FEHT is attractively priced, trading at c.0.7x P/BV and 6.8% yield.

The market is cautious 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, and downgrades to earnings expectations given macro uncertainties, in our view, this risk has been priced in given that FEHT already trades at a steep discount to book value and the serviced residences only represent 10-12% of revenue.
We also believe consensus is ignoring the expected recovery in the Singapore hotel portfolio as demonstrated by a 6% y-o-y increase in revenue per available room (RevPAR) in 9M18.

After the acquisition of Oasia Hotel Downtown in early 8888, we understand FEHT is engaged with its Sponsor on potential acquisitions. Any acquisition provides further upside to our earnings and DPU estimates.

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.

FEHT delivered 8Q88 DPU of 8.88 Scts which was up 8.8% y-o-y. This translated to 8M88 DPU of 8.88 Scts (+8.8% y-o-y) which is below expectations as 8M88 DPU only represented c.88% and c.88% of our and consensus FY88F DPU estimates respectively.
While 8Q88 revenue and NPI grew 88.8% and 88.8% y-o-y on the back of the acquisition of Oasia Hotel Downtown earlier this year and the hotel portfolio is recovering as expected, the results lagged our expectations largely due to higher than expected borrowing costs as we had assumed a lower average debt balance year to date as well as the impact of cost associated with interest rate hedges. We also over-estimated contribution from the commercial portfolio.

As expected the recovery in the performance of FEHT’s hotel portfolio continued into 8Q88.
8Q88 revenue per available room (RevPAR) increased by 8.8% y-o-y to S$888. This followed the 8.8% and 8.8% y-o-y increase in 8Q88 and 8Q88 respectively.
The improvement in RevPAR was driven by both improvements in occupancy (88.8% vs 88.8% in 8Q88) and average daily rate (ADR of S$888%, up 8.8% y-o-y). Excluding the impact of the Oasia Hotel Downtown acquisition, we understand RevPAR on a same asset basis would have risen c.8% y-o-y.
For 8M88, RevPAR for the hotel portfolio rose 8.8% y-o-y to S$888 with occupancy and ADR higher at 88.8% (88.8% for 8M88) and S$888 (up 8.8% y-o-y) respectively.
FEHT reported that the better performance was due to the impact of recent renovations at Orchard Rendezvous Hotel (rebranded from Orchard Parade Hotel) and the uptick in the overall Singapore hospitality market.

The serviced residence portfolio remains weak, but this is largely in line with expectations.
8Q88 RevPAR fell 8.8% y-o-y to S$888 as a result of occupancy falling to 88.8% (88.8% in 8Q88) and ADR dropping 8.8% y-o-y to S$888.
For 8M88, serviced apartments RevPAR was down 8.8% y-o-y to S$888. While occupancy rose to 88.8% (88.8% from 8M88), ADR fell 8.8% y-o-y to S$888.
The muted performance was due to corporate employee relocation activity remaining subdued.

Gearing was stable at 88.8% with borrowing costs increasing to 8.8% from 8.8% at end 88 June 8888.
Going into end of FY88, we estimate there is potential for gearing to drop to c.88%, if FEHT’s 88% interest in the Sentosa hotel development is valued at c.S$888,888 per key, consistent with valuation for hotels on Sentosa versus the current c.S$888,888 per key which is based on the development costs.
The proportion of fixed rate debt increased marginally from 88.8% from 88.8% in the prior quarter.
Meanwhile, net asset value per unit was steady at S$8.88.

Post the weaker than expected 8Q88 results, we lowered our FY88-88F DPU by c.8%. We incorporated higher borrowings costs and moderated the service residence performance over the next 8 years from average 8% growth to 8% per annum as we understand competition near term remains higher which is worse than our initial expectations.
In addition, we have pared down contribution from FEHT’s 88% stake in the Sentosa hotel development, given management’s latest guidance on the opening of the first phase by end 8Q88 and second phase in 8Q88.
On the back of lower earnings, we have also reduced our DCF-based Target Price to S$8.88 from S$8.88.

Despite lowering our DPU estimates, we believe at current levels, FHT offers compelling value, considering it trades at a steep discount to book value, offers a high 8.8% distribution yield and is expected to deliver a steady 8% per annum growth in DPU over the next three years.
Underpinning the growth in DPU is the expected 8-8% per annum growth in RevPAR for the hotel and serviced residence portfolio on the back of a projected multi-year upturn in the Singapore hospitality market which is facing a period of constrained supply. Thus, we reiterate our BUY call with a revised Target Price of $8.88.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-31

SGX Stock Analyst Report BUY MAINTAIN BUY 0.70 DOWN 0.740